Trade in the Aftermath of the Fall of the Iron Curtain
A Dissection of Trading Capital: Trade in the Aftermath of the Fall of the Iron Curtain Matthias Beesterm¨ollerand Ferdinand Rauch∗y This version: January 12, 2017 Abstract We study trade in Europe after the fall of the Iron Curtain, and show that the countries of the former Austro-Hungarian monarchy trade significantly more with one another after 1989 than predicted by a standard gravity model. This surplus trade declines linearly and monotonically over time. We suggest that the surplus comes from a mixture of increased trust, as well as better communication and information given Austria's relationship with its eastern neighbors before the wars and during isolation. Trading capital, established under Habsburg rule and maintained in the period of the Iron Curtain, seems to have survived over four decades of separation and gives an initial boost to trade. This surplus trade disappeared rapidly after 1990 as countries rearranged themselves with the new geopolitical circumstances. We document the rate of decay of these forces. Keywords: Trade, Gravity, Habsburg Empire JEL codes: F14, F15, N33, N34, N94 ∗This paper has been improved by the comments and suggestions of numerous colleagues and seminar partic- ipants including but not limited to James Anderson, Franz Baltzarek, Felix Butschek, Daniel Baumgarten, Tibor Besedes, Johannes Van Biesebroeck, Felix Butschek, Mary Cox, Carsten Eckel, Peter Egger, P´eter Es¨o,Robert Evans, Thibault Fally, Gabriel Felbermayr, Lisandra Flach, Lionel Fontagn´e,James Harrigan, Keith Head, Harald Heppner, Michael Irlacher, Beata Javorcik, Amid Khandelwaal, Helmut Konrad, Anna Koukal, Christopher Long, Thierry Mayer, Guy Michaels, Peter Neary, Volker Nitsch, Jana Osterkamp, Kevin O'Rourke, Chris Parsons, Steven Poelhekke, Monika Schnitzer, Jens S¨udekum,Pierre-Louis Vezina, Daniel Wissmann as well as seminar and conference participants from the LETC conference in Slovenia, EGIT D¨usseldorf,Paris, G¨ottingen,ETSG Munich, Vienna and Zurich.
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