Estimation of Country-Pair Data Models Controlling for Clustered Errors: with International Trade Applications
We consider cross-section regression models for country-pair data, such as gravity models for trade volume between countries or models of exchange rate volatility, allowing for the presence of country-specific errors. This induces clustered errors in a nonstandard setting. OLS standard errors that ignore this clustering are greatly underestimated. Under the assumption of random country-specific effects we provide analytical results that permit more efficient GLS estimation even in settings where the number of unique country-pairs is very large. We include applications to international data on real exchange rates and on bilateral trade that provided the motivation for this paper. The results are more generally applicable to regression with paired data.
|Date of creation:||31 Jan 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (530) 752-0741
Fax: (530) 752-9382
Web page: http://www.econ.ucdavis.edu
More information through EDIRC
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.:
- Robert Barro & Silvana Tenreyro, 2007.
"Economic Effects Of Currency Unions,"
Western Economic Association International, vol. 45(1), pages 1-23, 01.
- Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
- I-Hui Cheng & Howard J. Wall, 2005.
"Controlling for heterogeneity in gravity models of trade and integration,"
Federal Reserve Bank of St. Louis, issue Jan, pages 49-63.
- I-Hui Cheng & Howard J. Wall, 2004. "Controlling for heterogeneity in gravity models of trade and integration," Working Papers 1999-010, Federal Reserve Bank of St. Louis.
- Yongcheol Shin & Laura Serlenga, 2004.
"Gravity Models of the Intra-EU Trade: Application of the Hausman-Taylor Estimation in Heterogeneous Panels with Common Time-specific Factors,"
Econometric Society 2004 Far Eastern Meetings
671, Econometric Society.
- Laura Serlenga & Yongcheol Shin, 2004. "Gravity Models of the Intra-EU Trade: Application of the Hausman-Taylor Estimation in Heterogeneous Panels with Common Time-specific Factors," ESE Discussion Papers 105, Edinburgh School of Economics, University of Edinburgh.
- Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
- Ruud, Paul A., 1984. "Tests of Specification in Econometrics," Department of Economics, Working Paper Series qt4kq8m0hf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Kloek, T, 1981. "OLS Estimation in a Model Where a Microvariable Is Explained by Aggregates and Contemporaneous Disturbances Are Equicorrelated," Econometrica, Econometric Society, vol. 49(1), pages 205-07, January.
When requesting a correction, please mention this item's handle: RePEc:cda:wpaper:06-13. 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: (Scott Dyer)
If references are entirely missing, you can add them using this form.