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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)

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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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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2008_03eco.pdf
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Publisher 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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Find related papers by JEL classification:
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
F10 - International Economics - - Trade - - - General
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F15 - International Economics - - Trade - - - Economic Integration

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Leung, Siu Fai & Yu, Shihti, 1996. "On the choice between sample selection and two-part models," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 197-229. [Downloadable!] (restricted)
    Other versions:
  2. Greene, William H, 1981. "On the Asymptotic Bias of the Ordinary Least Squares Estimator of the Tobit Model," Econometrica, Econometric Society, vol. 49(2), pages 505-13, March. [Downloadable!] (restricted)
  3. Richard Baldwin & James Harrigan, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," NBER Working Papers 13214, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Nawata, Kazumitsu, 1994. "Estimation of sample selection bias models by the maximum likelihood estimator and Heckman's two-step estimator," Economics Letters, Elsevier, vol. 45(1), pages 33-40, May. [Downloadable!] (restricted)
  5. Jones, Andrew M., 2000. "Health econometrics," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 6, pages 265-344 Elsevier. [Downloadable!] (restricted)
  6. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January. [Downloadable!] (restricted)
  7. Duan, Naihua, et al, 1983. "A Comparison of Alternative Models for the Demand for Medical Care," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 115-26, April.
  8. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March. [Downloadable!]
    Other versions:
  9. Amemiya, Takeshi, 1984. "Tobit models: A survey," Journal of Econometrics, Elsevier, vol. 24(1-2), pages 3-61. [Downloadable!] (restricted)
  10. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Hurd, Michael, 1979. "Estimation in truncated samples when there is heteroscedasticity," Journal of Econometrics, Elsevier, vol. 11(2-3), pages 247-258. [Downloadable!] (restricted)
  12. Terza, Joseph V., 1985. "A Tobit-type estimator for the censored Poisson regression model," Economics Letters, Elsevier, vol. 18(4), pages 361-365. [Downloadable!] (restricted)
  13. Kenneth Y. Chay & James L. Powell, 2001. "Semiparametric Censored Regression Models," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 29-42, Fall. [Downloadable!] (restricted)
  14. Powell, James L., 1984. "Least absolute deviations estimation for the censored regression model," Journal of Econometrics, Elsevier, vol. 25(3), pages 303-325, July. [Downloadable!] (restricted)
  15. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March. [Downloadable!] (restricted)
  16. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, 09. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Natalie Chen & Dennis Novy, 2009. "International Trade Integration: A Disaggregated Approach," CEP Discussion Papers dp0908, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  2. Sampath Jayasinghe & John C. Beghin & GianCarlo Moschini, 2009. "Determinants of World Demand for U.S. Corn Seeds: The Role of Trade Costs," Food and Agricultural Policy Research Institute (FAPRI) Publications 09-wp484, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!]
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