The wise use of dummies in gravity models: export potentials in the Euromed region
In this paper, we estimate a gravity equation properly accounting for omitted exporter and importer’s overall trade resistance, through country yearly dummies for exporter and importer countries. We find that the omission of time varying multilateral trade resistance terms in the estimation of a gravity equation introduces important biases in the results, although correcting them means we can only compute differences between actual and predicted export shares, instead of levels, as usually done. An application to the calculation of trade potentials in the Euromed region (Southern and Eastern Mediterranean countries) shows that the omission of time varying multilateral trade resistance terms greatly influences the computation of export potentials as well as the estimated effect of signing a free trade agreement. Overall, we find that, except for Algeria, Jordan and Lebanon, Euromed countries’ share of exports to the EU as a whole is at, or slightly above, those predicted by a correctly specified gravity model, although the share of exports to some individual EU countries is significantly below the predictions of the gravity model. Except for those three countries, we find significant opportunities for export growth to the US, instead.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Benedictis Luca & Vicarelli Claudio, 2005.
"Trade Potentials in Gravity Panel Data Models,"
The B.E. Journal of Economic Analysis & Policy,
De Gruyter, vol. 5(1), pages 1-33, September.
- Feenstra, Robert C, 2002. "Border Effects and the Gravity Equation: Consistent Methods for Estimation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 491-506, December.
- Peter Egger, 2002.
"An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials,"
The World Economy,
Wiley Blackwell, vol. 25(2), pages 297-312, 02.
- Peter Egger, . "An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials," WIFO Working Papers 141, WIFO.
- Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
- Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
- James E. Anderson & Eric van Wincoop, 2001.
"Gravity with Gravitas: A Solution to the Border Puzzle,"
NBER Working Papers
8079, National Bureau of Economic Research, Inc.
- James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
- James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
- Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
- Ludvig SÃ¶derling, 2005. "Is the Middle East and North Africa Region Achieving its Trade Potential?," IMF Working Papers 05/90, International Monetary Fund.
- Péridy Nicolas, 2005. "Trade Prospects of the New EU Neighborhood Policy: Evidence from Hausman and Taylor's Models," Global Economy Journal, De Gruyter, vol. 5(1), pages 1-27, March.
When requesting a correction, please mention this item's handle: RePEc:bde:wpaper:0720. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mar�a Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de Espa�a)
If references are entirely missing, you can add them using this form.