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Abstract:
Short run gravity is a geometric weighted average of long run gravity and fixed bilateral capacity. As bilateral capacities become efficient, trade flows approach their long run gravity values. The model features (i) joint trade costs rising in bilateral and multilateral trade, (ii) tractable short and long run models of the extensive margin, and (iii) a structural ratio of short run to long run trade elasticities equal to a micro-founded buyers’ incidence elasticity. Results suggest an incidence elasticity around 1/4 for manufacturing trade during globalization 1988-2006. Inference combines short run gravity with two plausible dynamic specifications of capacity adjustment.
