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Estimating Gravity Equation Models in the Presence of Sample Selection and Heteroskedasticity

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  • Xiong, Bo
  • Chen, Sixia
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Abstract

Gravity 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 Info

Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124530.

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Date of creation: 2012
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Handle: RePEc:ags:aaea12:124530

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Related research

Keywords: 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;

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  1. Jason H. Grant & Kathryn A. Boys, 2012. "Agricultural Trade and the GATT/WTO: Does Membership Make a Difference?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 1-24.
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  5. Ranjan, Priya & Tobias, Justin, 2007. "Bayesian Inference in the Gravity Model," Staff General Research Papers 12721, Iowa State University, Department of Economics.
  6. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  7. shepherd, Ben, 2010. "Geographical Diversification of Developing Country Exports," World Development, Elsevier, vol. 38(9), pages 1217-1228, September.
  8. Felbermayr, Gabriel & Kohler, Wilhelm K., 2006. "Exploring the intensive and extensive margins of world trade," Munich Reprints in Economics 20610, University of Munich, Department of Economics.
  9. Lin Sun & Michael R. Reed, 2010. "Impacts of Free Trade Agreements on Agricultural Trade Creation and Trade Diversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(5), pages 1351-1363.
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Cited by:
  1. 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.
  2. Xiong, Bo & Beghin, John & Marette, St├ęphan, 2013. "Gains to French champagne makers from tariff liberalization," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150003, Agricultural and Applied Economics Association.

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