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Estimating the Gravity Model When Zero Trade Flows are Frequent

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Author Info

  • Will Martin

    ()
    (World Bank)

  • Cong S. Pham

    ()
    (Deakin University)

Abstract

In this paper we estimate the gravity model allowing for the pervasive issues of heteroscedasticity and zero bilateral trade flows identified in an influential recent paper by Santos Silva and Tenreyro. We use Monte Carlo simulations with data generated using a heteroscedastic, limited-dependent-variable process to investigate the extent to which different estimators can deal with the resulting parameter biases. While the Poisson Pseudo-Maximum Likelihood estimator recommended by Santos Silva and Tenreyro solves the heteroscedasticity-bias problem when this is the only problem, it appears to yield severely biased estimates when zero trade values are frequent. Standard threshold-Tobit estimators perform better as long as the heteroscedasticity problem is satisfactorily dealt with. The Heckman Maximum Likelihood estimators appear to perform well if true identifying restrictions are available.

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Bibliographic Info

Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2008_03.

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Length: 47 pages
Date of creation: 12 Oct 2008
Date of revision:
Handle: RePEc:dkn:econwp:eco_2008_03

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Cited by:
  1. Jayasinghe, Sampath & Beghin, John C. & Moschini, GianCarlo, 2008. "Determinants of World Demand for U.S. Corn Seeds: The Role of Trade Costs," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6402, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. 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.
  3. Li, Yuan & Beghin, John C., 2010. "A Meta-Analysis of Estimates of the Impact of Technical Barriers to Trade," Staff General Research Papers 31968, Iowa State University, Department of Economics.
  4. Chen, Natalie & Novy, Dennis, 2008. "International Trade Integration: A Disaggregated Approach," CEPR Discussion Papers 7103, C.E.P.R. Discussion Papers.
  5. Bo Xiong & John Beghin, 2012. "Does European aflatoxin regulation hurt groundnut exporters from Africa?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 39(4), pages 589-609, September.
  6. Oleksandr Shepotylo, 2009. "EU Integration and Trade: a Look from the Outside of the EU Eastern Border?," Discussion Papers 22, Kyiv School of Economics.
  7. Vollrath, Thomas L. & Hallahan, Charles B., 2009. "Economic costs and payoffs of bilateral/regional trade agreements," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49375, Agricultural and Applied Economics Association.
  8. Belkacem Laabas and Walid Abdmoulah, . "Determinants of Arab Intraregional Foreign Direct Investments," API-Working Paper Series 0905, Arab Planning Institute - Kuwait, Information Center.
  9. Xiong, Bo & Beghin, John C., 2012. "Stringent Maximum Residue Limits, Protectionism, and Competitiveness: The Cases of the US and Canada," Working Papers 142384, International Agricultural Trade Research Consortium.
  10. Raimondi, Valentina & Olper, Alessandro, 2009. "The sensitivity of trade flows to trade barriers," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 50658, Agricultural and Applied Economics Association.
  11. Will J. Martin & Kym Anderson & Cong S. Pham, 2009. "Effects of GATT/WTO on Asia's Trade Performance," School of Economics Working Papers 2009-11, University of Adelaide, School of Economics.
  12. Agostino, Mariarosaria & Trivieri, Francesco, 2014. "Geographical indication and wine exports. An empirical investigation considering the major European producers," Food Policy, Elsevier, vol. 46(C), pages 22-36.
  13. Olga Solleder, 2013. "Trade Effects of Export Taxes," IHEID Working Papers 08-2013, Economics Section, The Graduate Institute of International Studies, revised 08 Apr 2013.

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