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Accounting for Pairwise Heterogeneity in Bilateral Trade Flows: A Stochastic Varying Coefficient Gravity Model

  • Vangelis Tzouvelekas


    (Department of Economics, University of Crete, Greece)

This paper suggests an alternative way for estimating the gravity equation that takes into consideration country-pair heterogeneity in bilateral trade flows. Specifically, a stochastic varying coefficient gravity model based on Hildreth and Houck’s (1968) random coefficient regression is proposed, that eliminates heterogeneity bias inherent in standard econometric methods. The results indicate that the standard gravity estimates can differ substantially from what is obtained when heterogeneity is accounted for.

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Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0519.

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Length: 12 pages
Date of creation: 00 2005
Date of revision:
Handle: RePEc:crt:wpaper:0519
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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. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-94, September.
  3. Tamim Bayoumi & Barry Eichengreen, 1997. "Is Regionalism Simply a Diversion? Evidence from the Evolution of the EC and EFTA," NBER Chapters, in: Regionalism versus Multilateral Trade Arrangements, NBER-EASE Volume 6, pages 141-168 National Bureau of Economic Research, Inc.
  4. Sanso, Marcos & Cuairan, Rogelio & Sanz, Fernando, 1993. "Bilateral Trade Flows, the Gravity Equation, and Functional Form," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 266-75, May.
  5. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February.
  6. Swamy, P A V B, 1970. "Efficient Inference in a Random Coefficient Regression Model," Econometrica, Econometric Society, vol. 38(2), pages 311-23, March.
  7. repec:tpr:qjecon:v:110:y:1995:i:3:p:799-836 is not listed on IDEAS
  8. David Hummels & James Levinsohn, 1993. "Monopolistic Competition and International Trade: Reconsidering the Evidence," NBER Working Papers 4389, National Bureau of Economic Research, Inc.
  9. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
  10. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  11. James E. Anderson & Douglas Marcouiller, 1999. "Trade, Insecurity, and Home Bias: An Empirical Investigation," NBER Working Papers 7000, National Bureau of Economic Research, Inc.
  12. 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.
  13. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
  14. 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.
  15. Griffiths, William E., 1971. "Estimation Of Actual Response Coefficients In The Hildreth-Houck Random Coefficient Model," Staff Papers 14275, University of Minnesota, Department of Applied Economics.
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