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Estimating gravity equations with endogeneous trade costs

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  • Rudolph, Stephan
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    Abstract

    A basic assumption of the gravity equation of international trade is that increasing trade costs lower exports. Butintuition and theory imply that a high export volume lowers bilateral trade costs as well, because a fixed cost intensivetrade sector probably bears lower average costs with more trade. In this case, standard gravity estimation might bebiased due to simultaneity. This paper finds an empirical interdependency between exports and trade costs. Using asimultaneous equation model to face this problem improves the estimates compared to the standard gravity specification. --

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    Bibliographic Info

    Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 01/10.

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    Date of creation: 2010
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    Handle: RePEc:zbw:tuddps:0110

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    Related research

    Keywords: Gravity Equation; Trade Policy; Simultaneity Problem;

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    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. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
    3. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    4. Dennis Novy, 2012. "Gravity Redux: Measuring International Trade Costs with Panel Data," CEP Discussion Papers dp1114, Centre for Economic Performance, LSE.
    5. 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.
    6. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2003. "A generalized design for bilateral trade flow models," Economics Letters, Elsevier, vol. 80(3), pages 391-397, September.
    7. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
    8. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
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    Cited by:
    1. Udo Broll & Andreas Förster & Stephan Rudolph, 2010. "Die Handelskosten von Sachsen," ifo Dresden berichtet, Ifo Institute for Economic Research at the University of Munich, vol. 17(06), pages 17-22, December.

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