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Gravity Models of the Intra-EU Trade: Application of the Hausman-Taylor Estimation in Heterogeneous Panels with Common Time-specific Factors

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  • Yongcheol Shin
  • Laura Serlenga

Abstract

In this paper we follow recent developments of panel data studies and explicitly allow for the existence of unobserved common time-specific factors where their individual responses are also allowed to be heterogeneous across cross section units. In the context of this extended panel data framework we generalize the Hausman-Taylor estimation methodology and develop the associated econometric theory. We apply our proposed estimation technique along with the conventional panel data approaches to a comprehensive analysis of the gravity equation of bilateral trade flows amongst the 15 European countries over 1960-2001. Empirical results clearly demonstrate that our proposed approach fits the data reasonably well and provides much more sensible results than the conventional approach based on the fixed time dummies. These findings may highlight the importance of allowing for a certain degree of cross section dependence through unobserved heterogeneous time specific common effects, otherwise the resulting estimates would be severely biased

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 671.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:671

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Keywords: Gravity Models of Trade; Heterogeneous Panel Data; Hausman-Taylor Estimation; Time-specific Common Factors; Intra-EU Trade;

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References

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  1. André Sapir & Alexis Jacquemin, 1991. "Competition and imports in the European market," ULB Institutional Repository 2013/8220, ULB -- Universite Libre de Bruxelles.
  2. Markusen, James R & Wigle, Randall M, 1990. "Explaining the Volume of North-South Trade," Economic Journal, Royal Economic Society, vol. 100(403), pages 1206-15, December.
  3. 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.
  4. David Hummels & James Levinsohn, 1993. "Monopolistic Competition and International Trade: Reconsidering the Evidence," NBER Working Papers 4389, National Bureau of Economic Research, Inc.
  5. Brada, Josef C & Mendez, Jose, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Wiley Blackwell, vol. 41(2), pages 263-80.
  6. Peter Egger, . "A Note on the Proper Econometric Specification of the Gravity Equation," WIFO Working Papers 108, WIFO.
  7. Egger, Peter, 2004. "On the Problem of Endogenous Unobserved Effects in the Estimation of Gravity Models," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 19, pages 182-191.
  8. Simon J. Evenett & Wolfgang Keller, 1996. "On Theories Explaining the Success of the Gravity Equation," International Trade 9608001, EconWPA, revised 13 Jun 1997.
  9. Spiros Bougheas & Panicos Demetriades & Edgar Morgenroth, 1996. "Infrastructure, Transport Costs and Trade," Keele Department of Economics Discussion Papers (1995-2001) 96/7, Department of Economics, Keele University.
  10. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
  11. Brun, Jean-François & Carrère, Céline & de Melo, Jaime & Guillaumont, Patrick, 2002. "Has Distance Died? Evidence from a Panel Gravity Model," CEPR Discussion Papers 3500, C.E.P.R. Discussion Papers.
  12. László Mátyás & László Kónya & Mark N. Harris, 2000. "Modelling Export Activity of Eleven APEC Countries," Melbourne Institute Working Paper Series wp2000n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  13. Ahn, Seung Chan & Hoon Lee, Young & Schmidt, Peter, 2001. "GMM estimation of linear panel data models with time-varying individual effects," Journal of Econometrics, Elsevier, vol. 101(2), pages 219-255, April.
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Citations

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Cited by:
  1. A. Colin Cameron & Natalia Golotvina, 2005. "Estimation of Country-Pair Data Models Controlling for Clustered Errors: with International Trade Applications," Working Papers 613, University of California, Davis, Department of Economics.
  2. Giorgia Giovannetti & Marco Sanfilippo & Margherita Velucchi, 2011. "The “China effect” on EU Exports to OECD markets – A focus on Italy," Working Papers - Economics wp2011_17.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  3. Michal Bernard Pietrzak & Natalia Drzewoszewska & Justyna Wilk, 2012. "The Analysis of Interregional Migrations in Polandi n the Period of 2004-2010 using Panel Gravity Model," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 12, pages 111-122.
  4. FE, Doukouré Charles, 2011. "Qualité des Institutions et Commerce International: Évidence à Partir des Exportations de l'UEMOA
    [Institutions Quality and International Trade: Evidence from WAEMU Exports]
    ," MPRA Paper 33333, University Library of Munich, Germany.
  5. Marjan Petreski, 2013. "Southeastern European Trade Analysis: A Role for Endogenous CEFTA-2006?," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 49(5), pages 26-44, September.
  6. Nevena Stancheva, 2007. "Measurement of the Trade Flows between the EU and Mercosur through Gravitation Analysis," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 66-89.
  7. Agostino, Maria Rosaria & Aiello, Francesco & Cardamone, Paola, 2007. "Analyzing the Impact of Trade Preferences in Gravity Models. Does Aggregation Matter?," Working Papers 7294, TRADEAG - Agricultural Trade Agreements.
  8. Biermann, Franziska, 2012. "The impact of distance in seaborne trade: An analysis of bilateral container transport flows," HWWI Research Papers 134, Hamburg Institute of International Economics (HWWI).
  9. Bussière, Matthieu & Fidrmuc, Jarko & Schnatz, Bernd, 2005. "Trade integration of Central and Eastern European countries: lessons from a gravity model," Working Paper Series 0545, European Central Bank.
  10. De Blasi, Giuseppe & Seccia, Antonio & Carlucci, Domenico & Santeramo, Fabio G., 2007. "Analysis of Italian High Quality Wine Exports using the Gravity Model Approach," 105th Seminar, March 8-10, 2007, Bologna, Italy 7901, European Association of Agricultural Economists.
  11. repec:onb:oenbwp:y::i:105:b:1 is not listed on IDEAS
  12. Cortes, Maria, 2007. "Composition of Trade between Australia and Latin America: Gravity Model," Economics Working Papers wp07-19, School of Economics, University of Wollongong, NSW, Australia.
  13. Shujiro URATA & Misa OKABE, 2013. "The Impact of AFTA on Intra-AFTA Trade," Working Papers DP-2013-05, Economic Research Institute for ASEAN and East Asia (ERIA).
  14. Bussière, Matthieu & Schnatz, Bernd, 2006. "Evaluating China’s integration in world trade with a gravity model based benchmark," Working Paper Series 0693, European Central Bank.
  15. Bas Straathof & Gert Jan Linders & Arjan Lejour & Jan Möhlmann, 2008. "The internal market and the Dutch economy: implications for trade and economic growth," CPB Document 168, CPB Netherlands Bureau for Economic Policy Analysis.

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