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A generalized spatial error components model for gravity equations

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  • Peter Egger

    ()

  • Michael Pfaffermayr

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Abstract

Since the publication of the paper by Anderson and van Wincoop (J Econ Litt 42:691–751, 2004 ), the estimation of gravity models has turned increasingly structural. The benefit of this development is that empirical models which are based on few parameters explain data on bilateral trade flows relatively well, while being consistent with general equilibrium. The latter permits using the estimated parameters for comparative static analysis. In general, in the cross section such models involve country-pair-specific variables and exporter-specific as well as importer-specific variables. The latter are determined through structural model constraints. The disturbances on this model are typically assumed to be independently if not also identically distributed. This paper illustrates that the assumption of independently distributed disturbances is likely flawed in practice. Ignoring such independence leads to inconsistent test statistics and standard errors of the parameters. We present a structural gravity model which permits the disturbances to be cross-sectionally interdependent in up to three dimensions and illustrate the consequences of doing so for inference. Copyright Springer-Verlag Berlin Heidelberg 2016

Suggested Citation

  • Peter Egger & Michael Pfaffermayr, 2016. "A generalized spatial error components model for gravity equations," Empirical Economics, Springer, vol. 50(1), pages 177-195, February.
  • Handle: RePEc:spr:empeco:v:50:y:2016:i:1:p:177-195
    DOI: 10.1007/s00181-015-0980-5
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    References listed on IDEAS

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    1. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    2. J. M. C. Santos Silva & Silvana Tenreyro, 2015. "Trading Partners and Trading Volumes: Implementing the Helpman–Melitz–Rubinstein Model Empirically," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(1), pages 93-105, February.
    3. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September.
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    6. Peter Egger & Mario Larch & Kevin E. Staub & Rainer Winkelmann, 2011. "The Trade Effects of Endogenous Preferential Trade Agreements," American Economic Journal: Economic Policy, American Economic Association, vol. 3(3), pages 113-143, August.
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    Citations

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    Cited by:

    1. Baltagi, Badi H. & Egger, Peter H. & Kesina, Michaela, 2019. "Contagious exporting and foreign ownership: Evidence from firms in Shanghai using a Bayesian spatial bivariate probit model," Regional Science and Urban Economics, Elsevier, vol. 76(C), pages 125-146.
    2. Xiaoqing Ye & Xiangjun Wu, 2017. "Estimating three-dimensional nonlinear panel data models with interactive effects," Applied Economics Letters, Taylor & Francis Journals, vol. 24(10), pages 708-712, June.

    More about this item

    Keywords

    Bilateral trade flows; Gravity equation; Spatial random effects; C31; C33; F12; F17;

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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