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Structural gravity and fixed effects

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  • Fally, Thibault

Abstract

The gravity equation for trade flows is one of the most successful empirical models in economics and has long played a central role in the trade literature (Anderson, 2011). Different approaches to estimate the gravity equation, i.e. reduced-form or more structural, have been proposed. This paper examines the role of adding-up constraints as the key difference between structural gravity with “multilateral resistance” indexes and reduced-form gravity with simple fixed effects by exporter and importer. In particular, estimating gravity equations using the Poisson pseudo-maximum-likelihood estimator (Poisson PML) with fixed effects automatically satisfies these constraints and is consistent with the introduction of “multilateral resistance” indexes as in Anderson and van Wincoop (2003).

Suggested Citation

  • Fally, Thibault, 2015. "Structural gravity and fixed effects," Journal of International Economics, Elsevier, vol. 97(1), pages 76-85.
  • Handle: RePEc:eee:inecon:v:97:y:2015:i:1:p:76-85
    DOI: 10.1016/j.jinteco.2015.05.005
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    More about this item

    Keywords

    Gravity; Structural estimation; Poisson-PML estimator;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F15 - International Economics - - Trade - - - Economic Integration
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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