This project deals with "distance" as a key variable in international trade models, but does so in at least two innovative ways, by extending the meaning and bearing of "distance" to encompass several key distance related variables, which are often neglected in current contributions to the literature.
On the one hand, we build a model for the analysis of financial flows from advanced to emerging economies and reformulate the issue of transaction costs (Martin-Rey, 2004) in terms of a problem of trade in assets with different quality. The focus will be on countries' economic distance, as reflected in characteristics such as institutional development, regulation of markets, enforceability of laws and political risk. We will further consider the spillover effects from the country of origin to the country of destination, building on the idea that quality matters, with different intensity. We will thus model "perceived" quality as depending on investors¿ financial stress condition, and try to show that, besides the typical size effect, higher quality leads to higher asset demand and asset prices, and changes in "perceived" economic distance impact on the evolution of financial flows. We will run econometric estimations for cross-border bank flows from advanced to emerging economies for the period 2005-2014 and analyze the interaction of market segmentation and global spillover effects in determining the changes over time.
The other avenue we explore is that of modelling informational and other types of fixed costs to trade in a network related fashion. By generalizing some results in Chaney (2014) to a large bilateral dataset, albeit at a more aggregate level (two digit sector classification), we intend to show that geographic distance is relevant in explaining bilateral trade in goods and services, but "adjusted" distance, i.e. distance which accounts for the possibility of "remote" search by firms may be even more relevant in shaping the geography of trade flows.
