Estimating Gravity Equation Models in the Presence of Sample Selection and Heteroskedasticity
AbstractGravity equation models are widely used in international trade to assess the impact of various policies on the patterns of trade. Although recent literature provides solid micro-foundations for the gravity equation model, there is no consensus on how to estimate a gravity equation model in the presence of the two stylized features of trade data: frequent zeros and heteroskedasticity. We propose a Two-Step Nonlinear Least Square estimator that satisfactorily deals with both problems. Monte-Carlo experiments show that the proposed estimator strictly outperforms the Poisson Pseudo Maximum Likelihood (PPML), the Heckman sample selection model, and the E.T.-Tobit estimators, and that it weakly dominates the Truncated PPML model in the estimation of the intensive margin of trade. An empirical study of world trade in 1986 suggests that currency union and regional trade agreements facilitate trade primarily through improving market access, as opposed to intensifying pre-existing trade.
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Bibliographic InfoPaper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124530.
Date of creation: 2012
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gravity equation; heteroskedasticity; zeros; nonlinear least square; intensive margin; extensive margin; market access; Two-Step Nonlinear Least Square; International Relations/Trade; Research Methods/ Statistical Methods; F1; Q1; C5;
Find related papers by JEL classification:
- F1 - International Economics - - Trade
- Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
- NEP-ECM-2012-06-25 (Econometrics)
- NEP-INT-2012-06-25 (International Trade)
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