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Regional Integration and Trade: Controlling for Varying Degrees of Heterogeneity in the Gravity Model

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  • Marie M. Stack
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    Abstract

    The proliferation of regional trade agreements (RTAs) in the 1990s prompted a renewal of interest in studying the effect of regional integration on trade. Using a panel dataset of bilateral export flows from 12 EU countries to 20 OECD trading partners over the period 1992-2003, the trade effect of European regional integration, denoted by an EU dummy, is examined across a number of fixed effects (FE) specifications, each of which has been claimed as the correct econometric specification of the gravity model. Typically parsimonious in (time-varying) economic variables and abundant in fixed effects, the FE specifications allow for varying degrees of heterogeneity in the gravity model. Two gravity models are estimated: a gravity model of traditional trade determinants and a gravity model of new trade theory (NTT) determinants. Both gravity models provide reasonable coefficient estimates, although they vary somewhat across the FE specifications for the traditional gravity model. Both gravity models are congruent in suggesting that the coefficient of the EU dummy declines in magnitude and becomes insignificant as an increasing degree of heterogeneity is admitted into the model. This suggests the fundamental importance of the econometric specification when evaluating trade policy effects within a gravity framework. Copyright 2009 The Author. Journal compilation 2009 Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal World Economy.

    Volume (Year): 32 (2009)
    Issue (Month): 5 (05)
    Pages: 772-789

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    Handle: RePEc:bla:worlde:v:32:y:2009:i:5:p:772-789

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    1. Bussière, Matthieu & Fidrmuc, Jarko & Schnatz, Bernd, 2005. "Trade integration of Central and Eastern European countries: lessons from a gravity model," Working Paper Series 0545, European Central Bank.
    2. Raymond Vernon, 1970. "The Technology Factor in International Trade," NBER Books, National Bureau of Economic Research, Inc, number vern70-1, May.
    3. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2003. "A generalized design for bilateral trade flow models," Economics Letters, Elsevier, vol. 80(3), pages 391-397, September.
    4. I-Hui Cheng & Howard J. Wall, 2004. "Controlling for heterogeneity in gravity models of trade and integration," Working Papers 1999-010, Federal Reserve Bank of St. Louis.
    5. Peter Egger & Michael Pfaffermayr, 2003. "The proper panel econometric specification of the gravity equation: A three-way model with bilateral interaction effects," Empirical Economics, Springer, vol. 28(3), pages 571-580, July.
    6. James Harrigan, 2001. "Specialization and the Volume of Trade: Do the Data Obey the Laws?," NBER Working Papers 8675, National Bureau of Economic Research, Inc.
    7. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
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    Cited by:
    1. Pierluigi Montalbano & Silvia Nenci, 2012. "Assessing the Trade Impact of the European Neighborhood Policy on EU-MED Free Trade Area," Departmental Working Papers of Economics - University 'Roma Tre' 0147, Department of Economics - University Roma Tre.
    2. Petra Bubáková, 2013. "Gravity Model of International Trade, Its Variables, Assumptions, Problems and Applications," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2013(2), pages 3-24.
    3. Lin, Faqin, 2012. "The Uneven Roles of FTAs: Selection Effect or “Learning†Effect?," Review of Applied Economics, Review of Applied Economics, vol. 8(1).
    4. Maria Cipollina & Luca Salvatici & Luca De Benedictis & Claudio Vicarelli, 2013. "A note on dummies for policies in gravity models: a Montecarlo experiment," Departmental Working Papers of Economics - University 'Roma Tre' 0180, Department of Economics - University Roma Tre.

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