Date Added: Jan 2010
The past decade has witnessed an explosion of papers estimating gravity equations for cross-border financial holdings. While traditionally the territory of the international trade literature, this recent application of gravity to international finance is driven by new data, a good empirical fit of financial gravity equations and a plethora of potential policy applications. However, in contrast to the trade gravity literature, the international finance gravity literature is not grounded in any theory. This can lead to both faulty estimation due to omitted variables bias and incorrect comparative statics analysis.