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The wise use of dummies in gravity models: export potentials in the Euromed region

Author

Listed:
  • Juan Ruiz

    () (Banco de España)

  • Josep M. Vilarrubia

    () (Banco de España)

Abstract

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.

Suggested Citation

  • Juan Ruiz & Josep M. Vilarrubia, 2007. "The wise use of dummies in gravity models: export potentials in the Euromed region," Working Papers 0720, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0720
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/07/Fic/dt0720e.pdf
    File Function: First version, July 2007
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    References listed on IDEAS

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    Cited by:

    1. Sultan, Maryam & Munir, Kashif, 2015. "Export, Import and Total Trade Potential of Pakistan: A Gravity Model Approach," MPRA Paper 66621, University Library of Munich, Germany.
    2. Aitor Erce, 2008. "A structural model of sovereign debt issuance: assessing the role of financial factors," Working Papers 0809, Banco de España;Working Papers Homepage.
    3. M. D. Parra & I. Martinez-Zarzoso & C. Suárez-Burguet, 2016. "The impact of FTAs on MENA trade in agricultural and industrial products," Applied Economics, Taylor & Francis Journals, vol. 48(25), pages 2341-2353, May.
    4. Rym Ayadi & Luc De Wulf & Moez El Elj & Michael Gasiorek & Ahmed Ghoneim & Javier Lopez Gonzalez & Selen Guerin & Peter Holmes & Hammad Kassal & Maryla Maliszewska & Mahmut Tekce, 2009. "Economic Integration in the Euro-Mediterranean Region," CASE Network Reports 0089, CASE-Center for Social and Economic Research.
    5. Xing, Yuqing, 2012. "Processing trade, exchange rates and China's bilateral trade balances," Journal of Asian Economics, Elsevier, vol. 23(5), pages 540-547.
    6. Rubén Segura-Cayuela & Josep M. Vilarrubia, 2008. "The effect of foreign service on trade volumes and trade partners," Working Papers 0808, Banco de España;Working Papers Homepage.
    7. Maria Cipollina & David Laborde Debucquet & Luca Salvatici, 2017. "The tide that does not raise all boats: an assessment of EU preferential trade policies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(1), pages 199-231, February.
    8. Christian Volpe Martincus & Antoni Estevadeordal & Andrés Gallo & Jessica Luna, 2010. "Information Barriers, Export Promotion Institutions, and the Extensive Margin of Trade," IDB Publications (Working Papers) 3185, Inter-American Development Bank.
    9. elmallah, mariam, 2014. "The Euro-Med Free Trade Area: An Empirical Assessment of the main Trade Agreements' Effects," MPRA Paper 57448, University Library of Munich, Germany.
    10. Estrella Gómez-Herrera, 2013. "Comparing alternative methods to estimate gravity models of bilateral trade," Empirical Economics, Springer, vol. 44(3), pages 1087-1111, June.
    11. Felix Groba, 2014. "Determinants of trade with solar energy technology components: evidence on the porter hypothesis?," Applied Economics, Taylor & Francis Journals, vol. 46(5), pages 503-526, February.
    12. Natalia Drzewoszewska, 2014. "Searching for the Appropriate Measure of Multilateral Trade-Resistance Terms in the Gravity Model of Bilateral Trade Flows," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 14, pages 29-49.
    13. P. Montalbano & S. Nenci, 2014. "Assessing the trade impact of the European Neighbourhood Policy on the EU-MED Free Trade Area," Applied Economics, Taylor & Francis Journals, vol. 46(7), pages 730-740, March.
    14. Pedro J. Martinez Edo, 2011. "Reciprocal liberalization: Bilateral, plurilateral or multilateral?," STUDIES IN TRADE AND INVESTMENT, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    15. Maravall, A. & del Rio, A., 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Computational Statistics & Data Analysis, Elsevier, vol. 52(2), pages 975-998, October.
    16. D'Souza, Anna, 2012. "The OECD Anti-Bribery Convention: Changing the currents of trade," Journal of Development Economics, Elsevier, vol. 97(1), pages 73-87.
    17. Lopez-Gonzalez, Javier, 2012. "The Impact of Free Trade Agreements on Vertical Specialisation," Papers 442, World Trade Institute.
    18. Dascalescu, Virgil & Nicolae, Elena & Ion, Irina, 2010. "New Findings on Actual and Potential Trade between Romania and the Russian Federation: A Gravity Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 102-124, December.
    19. Cipollina, Maria & Laborde, David & Salvatici, Luca, 2013. "Do Preferential Trade Policies (Actually) Increase Exports? An analysis of EU trade policies," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150177, Agricultural and Applied Economics Association.
    20. Christian Volpe Martincus & Antoni Estevadeordal & Andrés Gallo & Jessica Luna, 2010. "Information Barriers, Export Promotion Institutions, and the Extensive Margin of Trade," IDB Publications (Working Papers) 39358, Inter-American Development Bank.
    21. Harb Georges & Shady Nora Abou, 2016. "Arab Trade Dynamics after the Implementation of the Pan Arab Free Trade Area (1998–2012)," Review of Middle East Economics and Finance, De Gruyter, vol. 12(1), pages 1-29, April.
    22. Isabel Argimón & Pablo Hernández de Cos, 2008. "The determinants of budget balances of the regional (Autonomous) governments," Working Papers 0803, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    gravity model; trade potentials; export shares; Euromed;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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