Home bias in trade puzzle


Home bias in trade puzzle

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.citation | last1 = McCallum| first1 = John T. | year=1995 |title= National Borders Matter: Canada-U.S. Regional Trade Patterns | journal = American Economic Review | volume = 85 | pages = 615-623]

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 have whittled this bias down to 6 to 12. This home bias in trade has later been documented among OECD countries.Fact|date=November 2007 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)citation | last1 = Wolf| first1 = Holger C. | year=2000|title= Intranational Home Bias in Trade | journal = Review of Economics and Statistics | volume = 82 | number=4| pages = 555-563] 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.Citation | last= Obsfeld | first= Maurice | last2= Rogoff | first2= Kenneth | year= 2000| editor-last= Bernanke | editor-first= Ben | editor2-last= Rogoff | editor2-first= Kenneth | contribution= The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? | title=NBER Macroeconomics Annual 2000 | volume = 15 | pages = 339-390 | publisher= The MIT Press | isbn = 0-262-02503-5] 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.

References


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