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Estimating Gravity Equation Models in the Presence of Sample Selection and Heteroskedasticity

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  • Xiong, Bo
  • Chen, Sixia

Abstract

Gravity equation models are widely used in international trade to assess the impact of various policies on the patterns of trade. Although recent literature provides solid micro-foundations for the gravity equation model, there is no consensus on how to estimate a gravity equation model in the presence of the two stylized features of trade data: frequent zeros and heteroskedasticity. We propose a Two-Step Nonlinear Least Square estimator that satisfactorily deals with both problems. Monte-Carlo experiments show that the proposed estimator strictly outperforms the Poisson Pseudo Maximum Likelihood (PPML), the Heckman sample selection model, and the E.T.-Tobit estimators, and that it weakly dominates the Truncated PPML model in the estimation of the intensive margin of trade. An empirical study of world trade in 1986 suggests that currency union and regional trade agreements facilitate trade primarily through improving market access, as opposed to intensifying pre-existing trade.

Suggested Citation

  • Xiong, Bo & Chen, Sixia, 2012. "Estimating Gravity Equation Models in the Presence of Sample Selection and Heteroskedasticity," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124530, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea12:124530
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    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:spr:weltar:v:154:y:2018:i:3:d:10.1007_s10290-018-0310-z is not listed on IDEAS
    5. repec:zbw:ifweej:201910 is not listed on IDEAS
    6. 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.
    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. 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.

    More about this item

    Keywords

    International Relations/Trade; Research Methods/ Statistical Methods;

    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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