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‘Dual’ gravity: using spatial econometrics to control for multilateral resistance

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  • BEHRENS, Kristian
  • ERTUR, Cem
  • KOCH, Wilfried

Abstract

We propose a quantity-based `dual' version of the gravity equation that yields an estimating equation with both cross-sectional interdependence and spatially lagged error terms. Such an equation can be concisely estimated using spatial econometric techniques. We illustrate this methodology by applying it to the Canada-U.S. data set used previously, among others, by Anderson and van Wincoop (2003) and Feenstra (2002, 2004). Our key result is to show that controlling directly for spatial interdependence across trade flows, as suggested by theory, significantly reduces border effects because it captures `multilateral resistance'. Using a spatial autoregressive moving average specification, we find that border effects between the U.S. and Canada are smaller than in previous studies: about 8 for Canadian provinces and about 1.3 for U.S. states. Yet, heterogeneous coefficient estimations reveal that there is much variation across provinces and states.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007059.

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Date of creation: 01 Aug 2007
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Handle: RePEc:cor:louvco:2007059

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Keywords: gravity equations; multi-region general equilibrium trade models; spatial econometrics; border effects;

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  1. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  2. Stephen Redding & Anthony J. Venables, 2001. "Economic Geography and International Inequality," CEP Discussion Papers dp0495, Centre for Economic Performance, LSE.
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  7. BEHRENS, Kristian & LAMORGESE, Andrea R. & OTTAVIANO, Gianmarco I.P. & TABUCHI, Takatoshi, 2005. "Testing the ‘home market effect’ in a multi-country world," CORE Discussion Papers 2005055, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Cem Ertur & Wilfried Koch, 2005. "Growth, Technological Interdependence and Spatial Externalities - Theory and Evidence," ERSA conference papers ersa05p651, European Regional Science Association.
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