Home bias in trade puzzle
Encyclopedia
The Home bias in trade puzzle is a widely-discussed problem in macroeconomics and international finance, first documented by John T. McCallum
in an article from 1995.
McCallum showed that for the United States and Canada, inter-province trade is 20 times larger than international trade, holding other determinants of trade fixed. Subsequent estimates by John F. Helliwell and others have whittled this bias down to 6 to 12. This home bias in trade has later been documented among OECD countries. The preferred explanation for this finding has been the presence of formal and informal trade barriers following national borders.
If presence of formal and informal trade barriers following national borders was the sole reason for this puzzle, home bias should not exist on the subnational level. Wolf (2000) finds, however, that home bias is present also within U.S. states.
Maurice Obstfeld
and Kenneth Rogoff
identifies this as one of the six major puzzles in international economics. The others are the Feldstein-Horioka puzzle
, the equity home bias puzzle
, the consumption correlations puzzle
, the purchasing power and exchange rate disconnect puzzle, and the Baxter-Stockman neutrality of exchange rate regime puzzle.
John McCallum
John McCallum, PC, MP is a Liberal Canadian politician, economist and university professor. Following the 2006 Federal Election, he became the Liberal Finance Critic in the Official Opposition Shadow Cabinet...
in an article from 1995.
McCallum showed that for the United States and Canada, inter-province trade is 20 times larger than international trade, holding other determinants of trade fixed. Subsequent estimates by John F. Helliwell and others have whittled this bias down to 6 to 12. This home bias in trade has later been documented among OECD countries. The preferred explanation for this finding has been the presence of formal and informal trade barriers following national borders.
If presence of formal and informal trade barriers following national borders was the sole reason for this puzzle, home bias should not exist on the subnational level. Wolf (2000) finds, however, that home bias is present also within U.S. states.
Maurice Obstfeld
Maurice Obstfeld
Maurice Moses "Maury" Obstfeld is a professor of economics at the University of California, Berkeley.He is well known for his work in international economics. He is among the most influential economists in the world according to IDEAS/RePEc....
and Kenneth Rogoff
Kenneth Rogoff
Kenneth Saul "Ken" Rogoff is currently the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University. He is also a chess Grandmaster.-Early life:...
identifies this as one of the six major puzzles in international economics. The others are the Feldstein-Horioka puzzle
Feldstein-Horioka puzzle
The Feldstein-Horioka puzzle is a widely-discussed problem in macroeconomics and international finance, first documented by Martin Feldstein and Charles Horioka in an 1980 paper. According to economic theory, if we assume that investors that are able to easily invest anywhere in the world, they ...
, the equity home bias puzzle
Equity home bias puzzle
The Equity home bias puzzle is the term given to describe the fact that individuals and institutions in most countries hold only modest amounts of foreign equity. This is puzzling since observed returns on national equity portfolios suggest substantial benefits from international diversification...
, the consumption correlations puzzle
Backus-Kehoe-Kydland puzzle
In economics, the Backus–Kehoe–Kydland consumption correlation puzzle, also known as the BKK puzzle, is the observation that consumption is much less correlated across countries than output.In an Arrow–Debreu economy, i.e...
, the purchasing power and exchange rate disconnect puzzle, and the Baxter-Stockman neutrality of exchange rate regime puzzle.