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On Estimation of Gravity Equation: A Cluster Analysis

Author

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  • Bozena Bobkova

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)

Abstract

This article questions the slope homogeneity in a gravity equation and proposes a partially heterogeneous framework for its estimation using panel data. We suggest to employ K-mean clustering to group countries according to the gravity equation variables. Further, the gravity model is estimated on these created homogeneous groups. We apply this procedure on analysis of German trade data and confirm the slope heterogeneity in the model. When we estimate the model on each cluster separately, the estimated coefficients and their standard errors vary sufficiently. Moreover, we show that the pooled estimation technique severely under- or overestimate the effect of given variables.

Suggested Citation

  • Bozena Bobkova, 2014. "On Estimation of Gravity Equation: A Cluster Analysis," Working Papers IES 2014/37, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Dec 2014.
    • Handle: RePEc:fau:wpaper:wp2014_37
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/5232/lang/cs
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    More about this item

    Keywords

    gravity model; K-mean clustering; Germany; slope heterogeneity;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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