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Gravity for Dummies and Dummies for Gravity Equations

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  • Baldwin, Richard
  • Taglioni, Daria

Abstract

This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop?s multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.

Suggested Citation

  • Baldwin, Richard & Taglioni, Daria, 2006. "Gravity for Dummies and Dummies for Gravity Equations," CEPR Discussion Papers 5850, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5850
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    More about this item

    Keywords

    Country dummies; Gravity equation; Pair dummies;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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