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Gravity model specification and the effects of the Canada-U.S. border

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  • Howard J. Wall

Abstract

There is a well-established literature finding that the Canada-U.S. border has a large dampening effect on trade, is asymmetric, and differs across provinces. In this paper, I demonstrate that the standard gravity model used to obtain these results provides biased estimates of the volume of trade. I attribute this to heterogeneity bias and reestimate the effects of the border using a gravity model that allows for heterogeneous gravity equations. Doing so does not alter the general results of existing studies, although it does yield a border effect that is 40 percent larger, reverses the border's asymmetry, and indicates very different provincial effects.

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File URL: http://research.stlouisfed.org/wp/more/2000-024
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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2000-024.

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Date of creation: 2000
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Handle: RePEc:fip:fedlwp:2000-024

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Related research

Keywords: Canada ; North American Free Trade Agreement;

References

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  1. I-Hui Cheng & Howard J. Wall, 2005. "Controlling for heterogeneity in gravity models of trade and integration," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 49-63.
  2. Anderson, Michael A & Smith, Stephen L S, 1999. "Do National Borders Really Matter? Canada-US Regional Trade Reconsidered," Review of International Economics, Wiley Blackwell, vol. 7(2), pages 219-27, May.
  3. Tamim Bayoumi & Barry Eichengreen, 1997. "Is Regionalism Simply a Diversion? Evidence from the Evolution of the EC and EFTA," NBER Chapters, in: Regionalism versus Multilateral Trade Arrangements, NBER-EASE Volume 6, pages 141-168 National Bureau of Economic Research, Inc.
  4. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  5. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
  6. James E. Anderson, 1999. "Why Do Nations Trade (So Little)?," Boston College Working Papers in Economics 428, Boston College Department of Economics.
  7. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  8. John F. Helliwell, 1996. "Do National Borders Matter for Quebec's Trade?," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 507-22, August.
  9. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
  10. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
  11. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters, in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. I-Hui Cheng & Howard J. Wall, 2004. "Controlling for heterogeneity in gravity models of trade and integration," Working Papers 1999-010, Federal Reserve Bank of St. Louis.
  2. Daniel J. Henderson & Daniel L. Millimet, 2008. "Is gravity linear?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 137-172.
  3. Nardella, Michele & Boccaletti, Stefano, 2004. "The Impact Of Eu And Us Agro-Food Non Tariff Measures On Exports From Developing Countries," 2004 Annual meeting, August 1-4, Denver, CO 20105, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Philippa Dee, 2005. "The Australia-US Free Trade Agreement: An Assessment," Asia Pacific Economic Papers 345, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  5. Anderson, Michael A. & Smith, Stephen L.S., 2007. "How does history matter? Hysteresis in Canadian trade," The North American Journal of Economics and Finance, Elsevier, vol. 18(3), pages 279-291, December.
  6. Nardella, Michele & Boccaletti, Stefano, 2003. "The Impact Of Technical Barriers On Us-Eu Agro-Food Trade," 2003 Annual meeting, July 27-30, Montreal, Canada 22012, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Tembo, Gelson & Jayne, Thomas S., 2009. "Agricultural Trade Flows among Developing Countries: Do Regional Preferential Trade Agreements make a Difference?," 2009 Conference, August 16-22, 2009, Beijing, China 51733, International Association of Agricultural Economists.
  8. Carlucci, Domenico & De Blasi, Giuseppe & Santeramo, Fabio Gaetano & Seccia, Antonio, 2008. "New challenges and opportunities for Italian exports of table wines and high quality wines," MPRA Paper 8728, University Library of Munich, Germany.

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