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Policy Measurement And Multilateral Resistance In Gravity Models

Author

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  • Maria Cipollina

    () (University of Molise)

  • Luca De Benedictis

    () (University of Macerata)

  • Luca Salvatici

    () (University Roma Tre)

  • Claudio Vicarelli

    () (ISTAT)

Abstract

Over the past decade, the gravity equation has emerged as the empirical workhorse in international trade to study the ex-post effects of trade policies on bilateral trade. In this paper we are concerned with the issue of how the econometric specification and the policy measurement choices can affect the goal to obtain accurate estimates of the coefficient associated with bilateral trade policies within a theoretically-consistent model. The problem is even more serious when the policy treatment is approximated through dummies as it is still often the case in the literature. Using a Monte Carlo simulation analysis, this paper shows that the use of fixed effects to control for unobserved heterogeneity leads to biased estimates of the policy impact even when the policy is measured through a continuous variable. The bias highlighted by our results is the combination of measurement error about bilateral trade costs (or preferences) and the specification used to proxy multilateral resistance terms.

Suggested Citation

  • Maria Cipollina & Luca De Benedictis & Luca Salvatici & Claudio Vicarelli, 2016. "Policy Measurement And Multilateral Resistance In Gravity Models," Working Papers LuissLab 16130, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:lleewp:16130
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    References listed on IDEAS

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    More about this item

    Keywords

    Gravity model; Multilateral trade resistance; Policy evaluation; Monte Carlo Analysis.;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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