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Estimating gravity equation models in the presence of sample selection and heteroscedasticity

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  • Bo Xiong
  • Sixia Chen

Abstract

Gravity models are widely used to explain patterns of trade. However, two stylized features of trade data, sample selection and heteroscedasticity challenge the estimation of gravity models. We propose a two-step method of moments (TS-MM) estimator that deals with both issues. The Monte-Carlo experiments show that the TS-MM estimates are resistant to various combinations of sample selection and heteroscedasticity. Moreover, the TS-MM estimator performs reasonably well even when the data generating process deviates from the TS-MM assumptions. We revisit the world trade in 1990 to illustrate the usefulness of the proposed model, with emphasis on the identification of the extensive margin of trade.

Suggested Citation

  • Bo Xiong & Sixia Chen, 2014. "Estimating gravity equation models in the presence of sample selection and heteroscedasticity," Applied Economics, Taylor & Francis Journals, vol. 46(24), pages 2993-3003, August.
  • Handle: RePEc:taf:applec:v:46:y:2014:i:24:p:2993-3003
    DOI: 10.1080/00036846.2014.920481
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Martin,William J. & Pham,Cong S., 2015. "Estimating the gravity model when zero trade flows are frequent and economically determined," Policy Research Working Paper Series 7308, The World Bank.
    2. Anirudh Shingal, 2016. "Colonial legacy, services trade and LDCs," RSCAS Working Papers 2016/70, European University Institute.
    3. repec:oup:erevae:v:46:y:2019:i:1:p:79-108. is not listed on IDEAS
    4. repec:zbw:ifweej:201910 is not listed on IDEAS
    5. Xiong, Bo & Beghin, John C. & Marette, Stephan, 2013. "Gains to French champagne makers from tariff liberalization," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150003, Agricultural and Applied Economics Association.
    6. Maria Cipollina & Luca Salvatici & Luca De Benedictis & Claudio Vicarelli, 2013. "A note on dummies for policies in gravity models: a Montecarlo experiment," Departmental Working Papers of Economics - University 'Roma Tre' 0180, Department of Economics - University Roma Tre.
    7. Mnasri, Ayman & Nechi, Salem, 2019. "New Approach to Estimating Gravity Models with Heteroscedasticity and Zero Trade Values," MPRA Paper 93426, University Library of Munich, Germany.
    8. repec:spr:weltar:v:154:y:2018:i:3:d:10.1007_s10290-018-0310-z is not listed on IDEAS

    More about this item

    JEL classification:

    • F1 - International Economics - - Trade
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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