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Comparing alternative methods to estimate gravity models of bilateral trade

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  • Estrella Gómez-Herrera

Abstract

The gravity equation has been traditionally used to predict trade flows across countries. However, several problems related with its empirical application still remain unsolved. The unobserved heterogeneity, the presence of heteroskedasticity in trade data or the existence of zero flows, which make the estimation of the logarithm unfeasible, are some of them. This paper provides a survey of the most recent literature concerning the specification and estimation methods of this equation. For a dataset covering 80% of world trade, the most widely extended estimators are compared, showing that the Heckman sample selection model performs better overall for the specification of gravity equation selected. Copyright Springer-Verlag 2013

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  • Estrella Gómez-Herrera, 2013. "Comparing alternative methods to estimate gravity models of bilateral trade," Empirical Economics, Springer, vol. 44(3), pages 1087-1111, June.
    • Handle: RePEc:spr:empeco:v:44:y:2013:i:3:p:1087-1111
    DOI: 10.1007/s00181-012-0576-2
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    More about this item

    Keywords

    International trade; Gravity model; Estimation methods; C13; C33; F10;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F10 - International Economics - - Trade - - - General

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