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Estimating Border Effects: The Impact of Spatial Aggregation

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  • Coughlin, Cletus C.

    () (Federal Reserve Bank of St. Louis)

  • Novy, Dennis

    () (University of Warwick, UK)

Abstract

Trade data are typically reported at the level of regions or countries and are therefore aggregates across space. In this paper, we investigate the sensitivity of standard gravity estimation to spatial aggregation. We build a model in which symmetric micro regions are aggregated into macro regions. We then apply the model to the large literature on border effects in domestic and international trade. Our theory shows that aggregation leads to border effect heterogeneity. Larger regions or countries are systematically associated with smaller border effects. The reason is that due to spatial frictions, aggregation across space increases the cost of trading within borders. The cost of trading across borders therefore appears relatively smaller. We call this mechanism the spatial attenuation effect. Even if no border frictions exist at the micro level, gravity estimation can still produce large border effects. We test our theory with trade flows at the level of U.S. states. Our results confirm the models predictions, with quantitatively strong heterogeneity patterns.

Suggested Citation

  • Coughlin, Cletus C. & Novy, Dennis, 2016. "Estimating Border Effects: The Impact of Spatial Aggregation," Working Papers 2016-6, Federal Reserve Bank of St. Louis, revised 31 Aug 2018.
  • Handle: RePEc:fip:fedlwp:2016-006
    DOI: 10.20955/wp.2016.006
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    References listed on IDEAS

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    Cited by:

    1. Anderson, James E. & Borchert, Ingo & Mattoo, Aaditya & Yotov, Yoto V., 2018. "Dark costs, missing data: Shedding some light on services trade," European Economic Review, Elsevier, vol. 105(C), pages 193-214.
    2. Hayakawa, Kazunobu, 2017. "Domestic and international border effects: The cases of China and Japan," China Economic Review, Elsevier, vol. 43(C), pages 118-126.
    3. James E. Anderson & Ingo Borchert & Aaditya Mattoo & Yoto V. Yotov, 2015. "Dark Costs, Missing Data: Shedding Some Light on Services Trade," CESifo Working Paper Series 5577, CESifo Group Munich.
    4. Herz, Benedikt & Varela-Irimia, Xosé-Luís, 2016. "Border Effects in European Public Procurement," MPRA Paper 76401, University Library of Munich, Germany, revised 24 Jan 2017.

    More about this item

    Keywords

    Gravity; Geography; Borders; Trade Costs; Heterogeneity; Home Bias; Spatial Attenuation; Modifiable Areal Unit Problem (MAUP);

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F15 - International Economics - - Trade - - - Economic Integration
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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