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Gravity Models of the Intra-EU Trade: Application of the Hausman-Taylor Estimation in Heterogeneous Panels with Common Time-specific Factors

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Abstract

In this paper we follow recent developments of panel data studies and explicitly allow for the existence of unobserved common time-specific factors where their individual responses are also allowed to be heterogeneous across cross section units. In the context of this extended panel data framework we generalize the Hausman-Taylor estimation methodology and develop the associated econometric theory. We apply our proposed estimation technique along with the conventional panel data approaches to a comprehensive analysis of the gravity equation of bilateral trade flows amongst the 15 European countries over 1960-2001. Empirical results clearly demonstrate that our proposed approach fits the data reasonably well and provides much more sensible results than the conventional approach based on the fixed time dummies. These findings may highlight the importance of allowing for a certain degree of cross section dependence through unobserved heterogeneous time specific common effects, otherwise the resulting estimates would be severely biased.

Suggested Citation

  • 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.
  • Handle: RePEc:edn:esedps:105
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    Cited by:

    1. Bas Straathof & Gert Jan Linders & Arjan Lejour & Jan Möhlmann, 2008. "The internal market and the Dutch economy: implications for trade and economic growth," CPB Document 168, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Babetskaia-Kukharchuk, Oxana & Maurel, Mathilde, 2004. "Russia's accession to the WTO: the potential for trade increase," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 680-699, December.
    3. Agostino, Maria Rosaria & Aiello, Francesco & Cardamone, Paola, 2007. "Analyzing the Impact of Trade Preferences in Gravity Models. Does Aggregation Matter?," Working Papers 7294, TRADEAG - Agricultural Trade Agreements.
    4. De Blasi, Giuseppe & Seccia, Antonio & Carlucci, Domenico & Santeramo, Fabio G., 2007. "Analysis of Italian High Quality Wine Exports using the Gravity Model Approach," 105th Seminar, March 8-10, 2007, Bologna, Italy 7901, European Association of Agricultural Economists.
    5. A. Colin Cameron & Natalia Golotvina, 2005. "Estimation of Country-Pair Data Models Controlling for Clustered Errors: with International Trade Applications," Working Papers 613, University of California, Davis, Department of Economics.
    6. Schnatz, Bernd & Bussière, Matthieu & Fidrmuc, Jarko, 2005. "Trade integration of Central and Eastern European countries: lessons from a gravity model," Working Paper Series 545, European Central Bank.
    7. Matthieu Bussière & Bernd Schnatz, 2009. "Evaluating China’s Integration in World Trade with a Gravity Model Based Benchmark," Open Economies Review, Springer, vol. 20(1), pages 85-111, February.
    8. Okabe, Misa & Urata, Shujiro, 2014. "The impact of AFTA on intra-AFTA trade," Journal of Asian Economics, Elsevier, vol. 35(C), pages 12-31.
    9. FE, Doukouré Charles, 2011. "Qualité des Institutions et Commerce International: Évidence à Partir des Exportations de l'UEMOA
      [Institutions Quality and International Trade: Evidence from WAEMU Exports]
      ," MPRA Paper 33333, University Library of Munich, Germany.
    10. Giorgia Giovannetti & Marco Sanfilippo & Margherita Velucchi, 2011. "The “China effect” on EU Exports to OECD markets – A focus on Italy," Working Papers - Economics wp2011_17.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    11. Thi Hanh Vu, 2013. "International Export Flows of Vietnam :A Gravity Model Approach," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(1), pages 83-108.
    12. Michal Bernard Pietrzak & Natalia Drzewoszewska & Justyna Wilk, 2012. "The Analysis of Interregional Migrations in Polandi n the Period of 2004-2010 using Panel Gravity Model," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 12, pages 111-122.
    13. Hanh Vu Thi, 2015. "Essays on the Export Performance of Vietnam/Essais sur la Performance à l'Exportation du Vietnam," ULB Institutional Repository 2013/216765, ULB -- Universite Libre de Bruxelles.
    14. Cortes, Maria, 2007. "Composition of Trade between Australia and Latin America: Gravity Model," Economics Working Papers wp07-19, School of Economics, University of Wollongong, NSW, Australia.
    15. repec:onb:oenbwp:y::i:105:b:1 is not listed on IDEAS
    16. Norehan Abdullah & Hussin Abdullah & Hadi M. Othman Abuhriba, 2014. "The Determinants of Trade and Trade Direction of Arab Maghreb Union (AMU)," Journal of Empirical Economics, Research Academy of Social Sciences, vol. 2(2), pages 46-62.
    17. Salvador Gil-Pareja & Rafael Llorca-Vivero & José A. Martínez-Serrano & Josep Oliver-Alonso, 2005. "The Border Effect in Spain," The World Economy, Wiley Blackwell, vol. 28(11), pages 1617-1631, November.
    18. Salvador Gil-Pareja & Rafael Llorca-Vivero & José A. Martínez-Serrano & Josep Oliver-Alonso, "undated". "The Border Effect in Spain," Working Papers 2004-28, FEDEA.
    19. Biermann, Franziska, 2012. "The impact of distance in seaborne trade: An analysis of bilateral container transport flows," HWWI Research Papers 134, Hamburg Institute of International Economics (HWWI).
    20. Nevena Stancheva, 2007. "Measurement of the Trade Flows between the EU and Mercosur through Gravitation Analysis," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 66-89.
    21. Mahdi Ghodsi, 2015. "The Role of Specific Trade Concerns Raised on TBTs in the Import of Products to the EU, USA and China," wiiw Working Papers 116, The Vienna Institute for International Economic Studies, wiiw.
    22. Marjan Petreski, 2013. "Southeastern European Trade Analysis: A Role for Endogenous CEFTA-2006?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(5), pages 26-44, September.

    More about this item

    Keywords

    gravity models of trade; heterogeneous panel data; hausman-taylor estimation; time-specific common factors; intra-EU trade;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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