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

  • Xiong, Bo
  • Chen, Sixia
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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.

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Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124530.

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Date of creation: 2012
Date of revision:
Handle: RePEc:ags:aaea12:124530
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  1. Martijn Burger & Frank van Oort & Gert-Jan Linders, 2009. "On the Specification of the Gravity Model of Trade: Zeros, Excess Zeros and Zero-inflated Estimation," Spatial Economic Analysis, Taylor & Francis Journals, vol. 4(2), pages 167-190.
  2. Dennis Novy, 2010. "International Trade Without CES: Estimating Translog Gravity," CEP Discussion Papers dp1031, Centre for Economic Performance, LSE.
  3. Lin Sun & Michael R. Reed, 2010. "Impacts of Free Trade Agreements on Agricultural Trade Creation and Trade Diversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(5), pages 1351-1363.
  4. Felbermayr, Gabriel & Kohler, Wilhelm K., 2006. "Exploring the intensive and extensive margins of world trade," Munich Reprints in Economics 20610, University of Munich, Department of Economics.
  5. Besedes, Tibor & Prusa, Thomas J., 2011. "The role of extensive and intensive margins and export growth," Journal of Development Economics, Elsevier, vol. 96(2), pages 371-379, November.
  6. Shepherd, Ben, 2008. "Geographical Diversification of Developing Country Exports," MPRA Paper 11267, University Library of Munich, Germany.
  7. Russell Davidson & James G. MacKinnon, 1981. "Tests for Model Specification in the Presence of Alternative Hypotheses: Some Further Results," Working Papers 430, Queen's University, Department of Economics.
  8. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, July.
  9. Jason H. Grant & Kathryn A. Boys, 2012. "Agricultural Trade and the GATT/WTO: Does Membership Make a Difference?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 1-24.
  10. Ranjan, Priya & Tobias, Justin, 2007. "Bayesian Inference in the Gravity Model," Staff General Research Papers 12721, Iowa State University, Department of Economics.
  11. repec:lmu:muenar:20646 is not listed on IDEAS
  12. Costas Arkolakis, 2008. "Market Penetration Costs and the New Consumers Margin in International Trade," NBER Working Papers 14214, National Bureau of Economic Research, Inc.
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