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Policy Measurement and Multilateral Resistance in Gravity Models

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  • Cipollina, Maria Pina
  • De Benedictis, Luca
  • Salvatici, Luca
  • Vicarelli, Claudio

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

  • Cipollina, Maria Pina & De Benedictis, Luca & Salvatici, Luca & Vicarelli, Claudio, 2016. "Policy Measurement and Multilateral Resistance in Gravity Models," MPRA Paper 75255, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:75255
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    2. Rezende de Castro, André Bueno & Kornher, Lukas, 2022. "The effect of trade and customs digitalization on agrifood trade: A gravity approach," 96th Annual Conference, April 4-6, 2022, K U Leuven, Belgium 321204, Agricultural Economics Society - AES.
    3. Frederik Stender, 2018. "MERCOSUR in gravity: an accounting approach to analyzing its trade effects," International Economics and Economic Policy, Springer, vol. 15(2), pages 501-522, April.

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    More about this item

    Keywords

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

    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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