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The Log of Gravity Revisited

Listed author(s):
  • Inmaculada Martínez-Zarzoso

    ()

    (Economics - Universidad Jaume I, Economics - University of Goettingen)

This paper evaluates the performance of alternative estimation methods for gravity models with heteroskedasticity and zero trade values. Both problematic issues, recently addressed by Santos Silva and Tenreyro in an influential paper, are re-examined here. We use Monte Carlo simulations to compare the Pseudo Poisson Maximum Likelihood (PPML) estimator recommended by Santos Silva and Tenreyro, a Gamma pseudo-maximum-likelihood (GPML), a Non-Linear Least Squares (NLS) estimator and a Feasible Generalized Least Squares (FGLS) estimator with more traditional techniques. Additionally, estimates of the gravity equation are obtained for three different data sets with the abovementioned methods. The results of the simulation study indicate that, although the PPML estimator is less affected by heteroskedasticity than others are, its performance is similar, in terms of bias and standard errors, to the FGLS estimator performance. GPML presents however the lowest bias and standard errors in the simulations without zero values. The results of the empirical estimations, using three different samples containing real data, indicate that the choice of estimator has to be made for each specific dataset. There is not a general "best" estimator and it is highly recommended to follow a model selection approach using a number of tests to select the more appropriate estimator for any application.

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File URL: https://hal.archives-ouvertes.fr/hal-00734529/document
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Paper provided by HAL in its series Post-Print with number hal-00734529.

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Date of creation: 23 Sep 2011
Publication status: Published in Applied Economics, Taylor & Francis (Routledge), 2011, 45 (03), pp.311-327. <10.1080/00036846.2011.599786>
Handle: RePEc:hal:journl:hal-00734529
DOI: 10.1080/00036846.2011.599786
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00734529
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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  1. Inmaculada Martinez-Zarzoso & Eva Maria Perez-Garcia & Celestino Suarez-Burguet, 2008. "Do transport costs have a differential effect on trade at the sectoral level?," Applied Economics, Taylor & Francis Journals, vol. 40(24), pages 3145-3157.
  2. Soloaga, Isidro & Alan Wintersb, L., 2001. "Regionalism in the nineties: what effect on trade?," The North American Journal of Economics and Finance, Elsevier, vol. 12(1), pages 1-29, March.
  3. Márquez-Ramos Laura & Martínez-Zarzoso Inmaculada & Suárez-Burguet Celestino, 2007. "The Role of Distance in Gravity Regressions: Is There Really a Missing Globalisation Puzzle?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-25, January.
  4. Manning, Willard G., 1998. "The logged dependent variable, heteroscedasticity, and the retransformation problem," Journal of Health Economics, Elsevier, vol. 17(3), pages 283-295, June.
  5. Santos Silva, J.M.C. & Tenreyro, Silvana, 2011. "Further simulation evidence on the performance of the Poisson pseudo-maximum likelihood estimator," Economics Letters, Elsevier, vol. 112(2), pages 220-222, August.
  6. 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 266-275, May.
  7. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
  8. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
  9. Robinson, P M, 1987. "Asymptotically Efficient Estimation in the Presence of Heteroskedasticity of Unknown Form," Econometrica, Econometric Society, vol. 55(4), pages 875-891, July.
  10. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  11. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 441-487.
  12. Manning, Willard G. & Mullahy, John, 2001. "Estimating log models: to transform or not to transform?," Journal of Health Economics, Elsevier, vol. 20(4), pages 461-494, July.
  13. Martínez-Zarzoso, Inmaculada & Felicitas, Nowak-Lehmann D. & Horsewood, Nicholas, 2009. "Are regional trading agreements beneficial?: Static and dynamic panel gravity models," The North American Journal of Economics and Finance, Elsevier, vol. 20(1), pages 46-65, March.
  14. Delgado, Miguel A., 1992. "Computing nonparametric functional estimates in semiparametric problems," UC3M Working papers. Economics 5821, Universidad Carlos III de Madrid. Departamento de Economía.
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