Brownbag Seminars: Trade Costs and Trade Imbalances

Abstract: We study how transportation costs affect the behaviour of the current account. We use an overlapping generations model (of perpetual youth) à la Blanchard-Yaari, in which countries can freely trade a riskless bond. The model allows for non-degenerate cross-country distributions of assets in steady state, which are independent of initial conditions. We combine this dynamic setup with a gravity framework, which enables us to use exact-hat algebra to solve the model as a function of observables.