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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
    DOI: 10.22004/ag.econ.124530
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    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. William Martin & Cong S. Pham, 2020. "Estimating the gravity model when zero trade flows are frequent and economically determined," Applied Economics, Taylor & Francis Journals, vol. 52(26), pages 2766-2779, May.
    3. Mnasri, Ayman & Nechi, Salem, 2021. "New nonlinear estimators of the gravity equation," Economic Modelling, Elsevier, vol. 95(C), pages 192-202.
    4. 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.
    5. Bernard Hoekman & Anirudh Shingal, 2020. "Aid for trade and international transactions in goods and services," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 320-340, May.
    6. Anirudh Shingal, 2016. "Colonial legacy, services trade and LDCs," RSCAS Working Papers 2016/70, European University Institute.
    7. Marie M Stack & Rob Ackrill & Martin Bliss, 2019. "Sugar trade and the role of historical colonial linkages," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 46(1), pages 79-108.
    8. Anirudh Shingal & Malte Ehrich, 2019. "Trade effects of standards harmonization in the EU: improved access for non-EU partners," Indian Council for Research on International Economic Relations (ICRIER) Working Paper 372, Indian Council for Research on International Economic Relations (ICRIER), New Delhi, India.
    9. Anirudh Shingal & Malte Ehrich & Liliana Foletti, 2021. "Re‐estimating the effect of heterogeneous standards on trade: Endogeneity matters," The World Economy, Wiley Blackwell, vol. 44(3), pages 756-787, March.
    10. Stacy Julius & Nnanna P. Azu & Maimuna Y. Muhammad, 2019. "Assessing the Impact of Terrorism in Trade Development in the SADC Region: A Gravity Model Approach," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(10), pages 1147-1159, October.
    11. Toshihide Mizuno & Mitsuhiro Fujimoto, 2022. "Directional dummies in gravity models: application to Japanese inter-municipal migration by age-sex group," Letters in Spatial and Resource Sciences, Springer, vol. 15(2), pages 161-171, August.
    12. Dario Fauceglia & Andrea Lassmann & Anirudh Shingal & Martin Wermelinger, 2018. "Backward participation in global value chains and exchange rate driven adjustments of Swiss exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 537-584, August.
    13. Yushi, Jiang & Borojo, Dinkneh Gebre, 2019. "The impacts of institutional quality and infrastructure on overall and intra-Africa trade," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-34.
    14. Hedoui, M. Amine & Beghin, John C., 2022. "Decomposing the impact of GMO regulation on bilateral trade: An application to corn trade," Staff Papers 329344, University of Nebraska-Lincoln, Department of Agricultural Economics.
    15. 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.

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