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Gravity Model Estimation: Fixed Effects vs. Random Intercept Poisson Pseudo Maximum Likelihood

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  • Prehn, Sören
  • Brümmer, Bernhard
  • Glauben, Thomas

Abstract

Since the work of Feenstra (2002), the standard Anderson & van Wincoop (2003) Gravity Model has been estimated using a fixed effects approach. However, a fixed effects approach has a major drawback: it does not allow for the estimation of exporter- and importer-invariant variables. Thus, economically relevant variables such as exporter and importer gross domestic product are disregarded. Here, we propose a random intercept model to address this gap. This approach not only provides identical estimates to a fixed effects approach, but also allows for the estimation of exporter- and importer-invariant variables.

Suggested Citation

  • Prehn, Sören & Brümmer, Bernhard & Glauben, Thomas, 2014. "Gravity Model Estimation: Fixed Effects vs. Random Intercept Poisson Pseudo Maximum Likelihood," IAMO Discussion Papers 169094, Institute of Agricultural Development in Transition Economies (IAMO).
    • Handle: RePEc:ags:iamodp:169094
    DOI: 10.22004/ag.econ.169094
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    Cited by:

    1. Koutchogna Kokou Edem Assogbavi & Stéphane Dées, 2023. "Environmental Policy and the CO2 Emissions Embodied in International Trade," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 84(2), pages 507-527, February.
    2. Güzin Bayar, 2018. "Estimating export equations: a survey of the literature," Empirical Economics, Springer, vol. 54(2), pages 629-672, March.
    3. Saima Nawaz, 2020. "Institutions, Regional Integration and Bilateral Trade in South Asia: PPML Based Evidence," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(2), pages 221-242.
    4. Newaz, Mohammad Khaleq & Park, Jin Suk, 2019. "The impact of trade intensity and Market characteristics on asymmetric volatility, spillovers and asymmetric spillovers: Evidence from the response of international stock markets to US shocks," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 79-94.
    5. Changyuan Luo & Shiyi Sun & Guanghua Wan, 2021. "The impact of political relations on international trade: China–Philippines island dispute as a quasi‐natural experiment," The World Economy, Wiley Blackwell, vol. 44(11), pages 3422-3441, November.
    6. Radovan Kastratović & Predrag Bjelić, 2023. "The Effectiveness Of Bilateral Investment Treaties In Attracting Foreign Direct Investment: The Case Of Serbia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 68(237), pages 37-68, April – J.
    7. Liudmila Popova & Ehsan Rasoulinezhad, 2016. "Have Sanctions Modified Iran’s Trade Policy? An Evidence of Asianization and De-Europeanization through the Gravity Model," Economies, MDPI, vol. 4(4), pages 1-15, October.
    8. Renner, Swetlana & Götz, Linde & Prehn, Sören & Glauben, Thomas, 2014. "The influence of infrastructure on regional wheat trade in Russia: A gravity model approach," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182840, European Association of Agricultural Economists.

    More about this item

    Keywords

    International Relations/Trade; Research Methods/ Statistical Methods;

    JEL classification:

    • F1 - International Economics - - Trade
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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