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Monte Carlos Appraisals of Gravity Model Specifications

  • Anderson, Michael A.
  • Ferrantino, Michael J.
  • Schaefer, Kurt C.

Many improvements have been proposed for the basic gravity model specification, most of which are confirmed by standard statistical tests due to the large number of observations often used to estimate such models. We use Monte Carlo experiments to examine situations in which features of models may be found statistically significant (or insignificant) when it is known ex ante that they are absent (or present) in the underlying data process. Erroneous assumptions about the presence or absence of lagged dependent variables, fixed effects, free-trade associations and customs unions are shown to introduce economically important bias in estimates of the coefficients of interest, and in some cases to be confirmed spuriously. Policy effects, such as for free trade associations and currency unions, can also be confirmed spuriously when they do not exist in the data-generating process.

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File URL: http://purl.umn.edu/15864
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Paper provided by United States International Trade Commission, Office of Economics in its series Working Papers with number 15864.

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Date of creation: 2004
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Handle: RePEc:ags:uitcoe:15864
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  1. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters, in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
  2. I-Hui Cheng & Howard J. Wall, 2005. "Controlling for heterogeneity in gravity models of trade and integration," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 49-63.
  3. Leamer, E. & Levingsohn, J., 1994. "International Trade Theory: The Evidence," Working Papers 368, Research Seminar in International Economics, University of Michigan.
  4. Ghosh, Sucharita & Yamarik, Steven, 2004. "Are regional trading arrangements trade creating?: An application of extreme bounds analysis," Journal of International Economics, Elsevier, vol. 63(2), pages 369-395, July.
  5. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
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