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A Within Estimator for Three-Level Data: An Application to the WTO Effect on Trade Flows

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Abstract

This paper proposes a within estimator for three-level data, such as time-variant bilateral trade flows. The estimator helps to address the computational difficulties in estimating, for instance, the gravity model of bilateral trade that needs to control for unobserved country-pair and country-time heterogeneity using fixed effects. Unlike the traditional within transformation that removes cross-sectional heterogeneity, the proposed transformation method removes all three types of heterogeneity, each of which varies in two dimensions of three-level data. We demonstrate the properties of the estimator using empirical examples and Monte Carlo simulations. Simulation results show that the proposed estimators with the adjusted standard errors consistently estimate coefficient parameters and perform correct inference when no data are missing or the missing data are random. When missing data are not random, the proposed within transformation can reduce bias to various degrees, depending on the order of demeaning and sources of bias. As an empirical application, we investigate the WTO effect puzzle by applying the proposed estimator to show that WTO membership has a definite positive effect on bilateral trade flows.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 501.

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Date of creation: 11 Feb 2014
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Handle: RePEc:qld:uq2004:501

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  1. Theo S. Eicher & Christian Henn, 2008. "In Search of WTO Trade Effects: Preferential Trade Agreements Promote Trade Strongly, But Unevenly," Working Papers UWEC-2008-22-FC, University of Washington, Department of Economics.
  2. Lancaster, Tony, 2000. "The incidental parameter problem since 1948," Journal of Econometrics, Elsevier, vol. 95(2), pages 391-413, April.
  3. Jeffrey M. Wooldridge, 2001. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262232197, December.
  4. Juyoung Cheong & Do Won Kwak & Kam Ki Tang, 2014. "Can Trade Agreements Curtail Trade Creation and Prevent Trade Diversion," Discussion Papers Series 500, School of Economics, University of Queensland, Australia.
  5. Rose, Andrew K, 2002. "Do We Really Know that the WTO Increases Trade?," CEPR Discussion Papers 3538, C.E.P.R. Discussion Papers.
  6. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
  7. Michael Tomz & Judith L. Goldstein & Douglas Rivers, 2007. "Do We Really Know That the WTO Increases Trade? Comment," American Economic Review, American Economic Association, vol. 97(5), pages 2005-2018, December.
  8. Yongcheol Shin & Laura Serlenga, 2007. "Gravity models of intra-EU trade: application of the CCEP-HT estimation in heterogeneous panels with unobserved common time-specific factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 361-381.
  9. 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.
  10. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  11. Roy, Jayjit, 2011. "Is the WTO mystery really solved?," Economics Letters, Elsevier, vol. 113(2), pages 127-130.
  12. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, number 9780521818551, April.
  13. Konya, Laszlo & Matyas, Laszlo & Harris, Mark, 2011. "GATT/WTO membership does promote international trade after all – Some new empirical evidence," MPRA Paper 34978, University Library of Munich, Germany, revised 20 Nov 2011.
  14. Xuepeng Liu, 2009. "GATT/WTO Promotes Trade Strongly: Sample Selection and Model Specification," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 428-446, 08.
  15. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
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