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Trade Potentials In Gravity Panel Data Models

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Author Info

  • Luca De Benedictis

    (DIEF – Dipartimento di Istituzioni Economiche e Finanziarie, University of Macerata, Italy)

  • Claudio Vicarelli

    (ISAE - Institute for Studies and Economic Analyses)

Abstract

In the last decade, a lot of effort has been produced in empirical international trade to explain bilateral volume of trade through the estimation of a gravity equation. A substantial share of this effort by scholars and Institutions regarded the estimate of trade potentials and the inference of trade effects of economic integration. In this paper we show - for the former euro-zone countries trade flows - how the result of a gravity model in terms of potential trade changes introducing time invariant country-specific effects and dynamics. In that case, our estimates give a more accurate account of the spread between actual and potential trade. Moreover, confronting the in-sample trade potential index derived from different estimators we give evidence of the convergence of the index towards the demarcation value corresponding to the equality between observed and predicted trade flows. Finally, we show how the sign of the index is not robust to a change of estimator, casting doubts on the soundness of strong policy implications based on the (in)existence of unrealized trade potentials.

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Bibliographic Info

Paper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 44.

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Length: 52 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:isa:wpaper:44

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Keywords: International Bilateral Trade; Gravity Models; Trade Potentials; Dynamic Panel data;

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References

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  1. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  2. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January.
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  12. Wang, Zhen Kun & Winters, L. Alan, 1991. "The Trading Potential of Eastern Europe," CEPR Discussion Papers 610, C.E.P.R. Discussion Papers.
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  14. Nilsson, Lars, 2000. "Trade integration and the EU economic membership criteria," European Journal of Political Economy, Elsevier, vol. 16(4), pages 807-827, November.
  15. Brenton, Paul & Di Mauro, Francesca, 1999. "The Potential Magnitude and Impact of FDI flows to CEECs," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 59-74.
  16. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
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  18. Hamilton, C.B. & Winters, L.A., 1992. "Opening Up International Trade in Eastern Europe," Papers 511, Stockholm - International Economic Studies.
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