From theory to policy with gravitas: A solution to the mystery of the excess trade balances

Bilateral trade balances often play a controversial role in the international policy debate. They may reflect hidden and asymmetric (i.e., unfair) barriers and/or aggregate imbalances due to macroeconomic factors. Several studies give credence former argument argue that standard gravity forces fail explain observed bilateral balances, dubbing this “The Mystery of Excess Trade Balances”. We solve mystery show model explains well. Our analysis suggests that, on average, there is little room for cost asymmetries lead except certain sectors (e.g., Mining Services), where modeling direct costs can be improved. also uncover new property structural multilateral resistances as costs. This exactly what solves mystery.