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 a factor from 6 to 12.
This home bias in trade has later been documented among
OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
countries. The preferred explanation for this finding has been the presence of formal and informal trade barriers following national borders. Another possible solution to the fact that domestic trade is 20 times larger than international trade could be that domestically traders speak the same language.
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 Moses "Maury" Obstfeld (born March 19, 1952) is a professor of economics at the University of California, Berkeley and previously Chief Economist at the International Monetary Fund. He is also a nonresident senior fellow at the Peterson ...
and
Kenneth Rogoff
Kenneth Saul Rogoff (born March 22, 1953) is an American economist and chess Grandmaster. He is the Thomas D. Cabot Professor of Public Policy and professor of economics at Harvard University.
Early life
Rogoff grew up in Rochester, New York. ...
identify 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.
References
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International finance
International macroeconomics
Economic puzzles