Gravity with Gravitas: A Solution to the Border Puzzle

Once MR terms are fully accounted for, the estimate of the effects of contiguous borders decreases by half.

“we find that once we account fully for the MR terms, the estimate of the effects of contiguous borders decreases in half.”

The introduction of multilateral resistance (MR) terms by Anderson and van Wincoop (2003) is one of the major theoretical developments in the gravity literature.

“One of the major theoretical developments in the gravity literature is the introduction of the MR terms by Anderson and van Wincoop (2003).”

All theoretical gravity models and corresponding CGE analysis include domestic trade flows.

“Even though all theoretical gravity models (e.g., Anderson, 1979;Anderson & van Wincoop, 2003;Arkolakis et al., 2012;Eaton & Kortum, 2002) and corresponding CGE analysis include domestic trade flows, the benefits of using theory-consistent domestic trade flows in estimating gravity models were recognised only more recently.”

MRs capture the fact that trade between two countries depends not only on their sizes and bilateral trade costs but also on how remote they are from the rest of the world.

“Intuitively, the MRs capture the fact that trade between two countries depends not only on their sizes and the bilateral trade costs between them but also on how remote (geographically and economically) these countries are from the rest of the world.”