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Gravity for Dummies and Dummies for Gravity Equations

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  • Baldwin, Richard
  • Taglioni, Daria

Abstract

This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop’s multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5850.

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Date of creation: Sep 2006
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Handle: RePEc:cpr:ceprdp:5850

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Keywords: country dummies; gravity equation; pair dummies;

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References

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