Regional integration and trade: A panel cointegration approach to estimating the gravity model
Using a panel data set of bilateral export flows from 12 European Union (EU) countries to 20 Organisation for Economic Co-operation and Development (OECD) trading partners over the period 1992-2003, a panel cointegration approach to estimating the gravity model is adopted to test for the significance of European regional integration. A comparison of the results indicates that a positive and significant coefficient estimate of the EU dummy variable is found for both the pooled ordinary least squares (POLS) estimator and the dynamic ordinary least squares (DOLS) estimator. The results, however, diverge once fixed effects are admitted into the model. The least squares dummy variable (LSDV) estimator suggests a small positive effect of EU integration on trade. In contrast, the dynamic LSDV estimator indicates that regional integration has a larger beneficial effect on trade. The results highlight the fundamental importance of properly accounting for endogeneity when evaluating trade policy effects.
Volume (Year): 20 (2011)
Issue (Month): 1 ()
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