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A Spatial-Filtering Zero-Inflated Approach to the Estimation of the Gravity Model of Trade

Listed author(s):
  • Rodolfo Metulini

    (Department of Economics and Management, University of Brescia, Italy)

  • Roberto Patuelli

    (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy)

  • Daniel A. Griffith

    (School of Economic, Political & Policy Sciences, The University of Texas at Dallas, USA)

Nonlinear estimation of the gravity model with Poisson/negative binomial methods has become popular to model international trade flows, because it permits a better accounting for zero flows and extreme values in the distribution tail. Nevertheless, as trade flows are not independent from each other due to spatial autocorrelation, these methods may lead to biased parameter estimates. To overcome this problem, eigenvector spatial filtering variants of the Poisson/negative binomial specification have been proposed in the literature of gravity modelling of trade. However, no specific treatment has been developed for cases in which many zero flows are present. This paper contributes to the literature in two ways. First, by employing a stepwise selection criterion for spatial filters that is based on robust (sandwich) p-values and does not require likelihood-based indicators. In this respect, we develop an ad hoc backward stepwise function in R. Second, using this function, we select a reduced set of spatial filters that properly accounts for importer-side and exporter-side specific spatial effects, both at the count and the logit processes of zero-inflated methods. Applying this estimation strategy to a cross-section of bilateral trade flows between a set of worldwide countries for the year 2000, we find that our specification outperforms the benchmark models in terms of model fitting, both considering the AIC and in predicting zero (and small) flows.

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File URL: http://www.rcea.org/RePEc/pdf/wp16-26.pdf
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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 16-26.

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Date of creation: Oct 2016
Handle: RePEc:rim:rimwps:16-26
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  1. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
  2. 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.
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