ECMODE1639

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HomeandregionalbiasesandbordereffectsinArmingtontypemodels☆

JohnWhalleya,b,c,⁎,XianXina,d

aDepartmentofEconomics,TheUniversityofWesternOntario,London,Ontario,CanadaN6A5C2bNationalBureauofEconomicResearch,(NBER),Cambridge,MA,U.S.AcTheCentreforInternationalGovernanceInnovation(CIGI,Waterloo),CanadadCollegeofEconomicsandManagement,ChinaAgriculturalUniversity,Beijing,PRChina

abstractarticleinfo

Articlehistory:Accepted31July2008

JELclassification:F10

Keywords:BordereffectHomebiasTradeWediscussbiasesinpreferencesandtheirtradeeffectsintermsofimpactsonnon-neutraltradeflowsmotivatedbyrecentliteratureonbothhomebiasandthebordereffect.Thesetermstakeonmultipledefinitionsintheliteratureandareoftenusedinterchangeablyeventhoughtheydiffer.Thebordereffectreferstoahigherproclivitytotradebehindratherthanacrossnationalbordersandisusuallydefinedbythecoefficientsofregionaldummiesfromanestimatedgravitymodel.Itcanbepresentbothindataandincounterfactualmodelsolutions.SometimesthereducedformofthegravitymodelusedisassertedtoreflectanArmingtontypemodel.Forthebordereffecttooccurasamodeloutcome,astructuralmodelwithatleast2homeregionsand1countryabroadisneeded.Incontrasttocurrentliterature,weofferacharacterizationofvariousformsofpreferencebiasintrademodelsandmeasuresoftheirassociatedtradeeffectsbasedonaconceptwetermtradeneutrality.Theseeffectsgobeyondconventionalbordereffects,andcanbebothacrossandwithinborders.HomebiasistypicallyspecifiedasanArmingtonpreferencefordomesticovercomparableforeignproductsinatrademodelwheregoodsareheterogeneousacrosscountries.Itisreflectedinbothmodelstructureandparameterization,butdefinedinseveraldifferentwaysintheliterature.Weassessthecontributionofeachformofbiastothesetofpossibletradeeffectsusingacalibratedmodelwith3Canadianregions,theU.S.,andtherestoftheworldusing2001data.Wealsoevaluatehowmuchoftheconventionalbordereffectisaccountedforwhenmodelbiasesaremodifiedinvariousways.©2008PublishedbyElsevierB.V.

1.Introduction

Thelast10yearshaveyieldedalargebodyofresearchontwo

seeminglycloselyrelatedissues:thebordereffectandhomebias.The

bordereffectisafeaturethatcanbepresenteitherinobserveddataor

acounterfactualmodelsolutionandisusuallyassociatedwith

McCallum's(1995)paperinwhichheusedthegravitymodelapplied

toboththeinternationalandinterprovincialtradeofCanadianprov-

incestoshowthatevencorrectingfordistancethereisstillalarge

effectoftheCanadianborderonCanada–UStradepatterns.Thisistrue

eveniftherearelowtariffsinbothcountries.McCallum'sobjective

wastocounterearlierclaimsintheliteraturethatduetopostwar

economicintegrationintheOECDbordershadeffectivelydisappeared

intermsoftheirimpactsonbehavior.

Multipleconstructsareusedtorepresenthomebiasbyvarious

authors(Trelfer,1995;BlonigenandWilson,1999;HeadandRies,2001;BrulhartandTrionfetti,2005;HillberryandHummels,2002).

Sometimesitisassumedtobereflectedinshareparametersthat

weightstheimportgoodrelativetothedomesticgoodinArmington

typetrademodel(BlonigenandWilson,1999);sometimesinrelative

shareparametersacrosscountryArmingtonfunctionsina2country

models(HeadandRies,2001);sometimesthroughanaddedtermin

preferenceswhichgivesutilityfromconsumptionofadomesticgood

overtotalconsumption(BrulhartandTrionfetti,2005);sometimesin

anadditionalterminlineardemands(Trelfer,1995);sometimesasa

featureofdata(HillberryandHummels,2002).

Neitherofthesetwoterms,homebiasorbordereffect,isclearlyor

uniformlydefinedintheliterature.Thesetwotermsbordereffectand

homebiasalsodonotrefertothesamething,despiteseveralplacesin

theliteraturewherethetermsareusedinterchangeably.Obstfeldand

Rogoff(2000),forinstance,refertothe“McCallumHomeBiasin

Trade”puzzleasoneofthe6leadingpuzzlesinmoderninternational

macroeconomics,1andtorecentotherliterature(Wei,1996;

Evans,EconomicModelling26(2009)309–319

☆TheauthorswouldliketothanktheEditorandanonymousreferees,JamesDavies,RandyWigle,EdgarCudmore,andYongfuChenfortheirhelpfulcommentsandsuggestions.FinancialsupportfromaCNPost-doctoralFellowshipsinTransportationPolicyheldbythesecondauthoralsomakesthispaperpossibleandisgreatlyappreciated.⁎Correspondingauthor.DepartmentofEconomics,TheUniversityofWesternOntario,London,Ontario,CanadaN6A5C2.E-mailaddresses:jwhalley@uwo.ca(J.Whalley),xinxian@cau.edu.cn(X.