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A SUR-EC-AR System Gravity Model of Trade

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  • Jaya Krishnakumar

    ()
    (University of Geneva)

Abstract

This paper proposes a system of equations for modelling the volume of bilateral trade in multiple goods for a given set of countries. We postulate a gravity equation for each traded good rather than for the aggregate volume of bilateral trade. Special features of the system are the possibility of correlated explanatory variables, presence of panel data effects and autocorrelated disturbances. The correlated explanatory variables could be either correlated with the specific effects only or correlated with both the specific effects and the residual errors. Proper ways of specifying and estimating a model incorporating all the above characteristics are discussed and tests are suggested to verify some of the assumptions.

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Bibliographic Info

Paper provided by International Conferences on Panel Data in its series 10th International Conference on Panel Data, Berlin, July 5-6, 2002 with number B4-4.

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Date of creation: Mar 2002
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Handle: RePEc:cpd:pd2002:b4-4

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Related research

Keywords: bilateral trade; gravity model; panel data models; instrumental variables; autocorrelated errors;

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  1. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-98, November.
  2. Peter Egger, . "An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials," WIFO Working Papers 141, WIFO.
  3. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
  4. Gros, Daniel & Gonciarz, Andrzej, 1996. "A note on the trade potential of Central and Eastern Europe," European Journal of Political Economy, Elsevier, vol. 12(4), pages 709-721, December.
  5. Baltagi, Badi H. & Li, Qi, 1995. "Testing AR(1) against MA(1) disturbances in an error component model," Journal of Econometrics, Elsevier, vol. 68(1), pages 133-151, July.
  6. Wang, Z.K. & Winters, L.A., 1992. "The Trading Potential of Eastern Europe," Discussion Papers 92-21, Department of Economics, University of Birmingham.
  7. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters, in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
  8. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
  9. Edward E. Leamer & James Levinsohn, 1994. "International Trade Theory: The Evidence," NBER Working Papers 4940, National Bureau of Economic Research, Inc.
  10. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January.
  11. 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.
  12. Baltagi, Badi H., 1981. "Simultaneous equations with error components," Journal of Econometrics, Elsevier, vol. 17(2), pages 189-200, November.
  13. Elhanan Helpman & Paul Krugman, 1987. "Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258087x, December.
  14. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
  15. Fritz Breuss & Peter Egger, 1999. "How Reliable Are Estimations of East-West Trade Potentials Based on Cross-Section Gravity Analyses?," Empirica, Springer, vol. 26(2), pages 81-94, June.
  16. Deardoff, A.V., 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," Working Papers 382, Research Seminar in International Economics, University of Michigan.
  17. Baltagi, Badi H. & Wu, Ping X., 1999. "Unequally Spaced Panel Data Regressions With Ar(1) Disturbances," Econometric Theory, Cambridge University Press, vol. 15(06), pages 814-823, December.
  18. Baltagi, Badi H, 1980. "On Seemingly Unrelated Regressions with Error Components," Econometrica, Econometric Society, vol. 48(6), pages 1547-51, September.
  19. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February.
  20. Hamilton, C.B. & Winters, L.A., 1992. "Opening Up International Trade in Eastern Europe," Papers 511, Stockholm - International Economic Studies.
  21. repec:fth:michin:382 is not listed on IDEAS
  22. Baltagi, Badi H. & Li, Qi, 1991. "A transformation that will circumvent the problem of autocorrelation in an error-component model," Journal of Econometrics, Elsevier, vol. 48(3), pages 385-393, June.
  23. Balestra, Pietro & Varadharajan-Krishnakumar, Jayalakshmi, 1987. "Full Information Estimations of a System of Simultaneous Equations with Error Component Structure," Econometric Theory, Cambridge University Press, vol. 3(02), pages 223-246, April.
  24. Cornwell, Christopher & Schmidt, Peter & Wyhowski, Donald, 1992. "Simultaneous equations and panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 151-181.
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Cited by:
  1. Erika Vianna Grossrieder, 2006. "Preference Erosion: The case of Bangladesh - A SUR-EC-AR Gravity Model of Trade," IHEID Working Papers 18-2007, Economics Section, The Graduate Institute of International Studies, revised Aug 2007.

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