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A note on dummies for policies in gravity models: a Montecarlo experiment

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

Abstract

The use of the gravity model to evaluate the effect of policies in a cross-country framework is largely predominant in the international economics empirical literature. This literature usually implements importer and exporter fixed effects to account for the theoretical Multilateral Trade Resistances, while preferential trade policies are approximated through the use of dummy variables. Results from a Monte Carlo experiment confirms that the identification of trade policy im pact using a gravity equation including fixed effects is severely limited. Moreover, the consequences of the error in measurement of the policy variable are magnified by the fixed effects control for unobserved heterogeneity.

Suggested Citation

  • Maria Cipollina & Luca Salvatici & Luca De Benedictis & Claudio Vicarelli, 2013. "A note on dummies for policies in gravity models: a Montecarlo experiment," Departmental Working Papers of Economics - University 'Roma Tre' 0180, Department of Economics - University Roma Tre.
    • Handle: RePEc:rtr:wpaper:0180
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    References listed on IDEAS

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    2. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
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    9. Maria Cipollina & Luca Salvatici, 2010. "The trade impact of European Union agricultural preferences," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 13(1), pages 87-106.
    10. Cecília Hornok, 2011. "Gravity or Dummies? The Limits of Identification in Gravity Estimations," CeFiG Working Papers 15, Center for Firms in the Global Economy, revised 26 Sep 2011.
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    12. Luca De Benedictis & Luca Salvatici (ed.), 2011. "The Trade Impact of European Union Preferential Policies," Springer Books, Springer, number 978-3-642-16564-1, December.
    13. Martin, Will & Pham, Cong S., 2008. "Estimating the gravity model when zero trade flows are frequent," Working Papers eco_2008_03, Deakin University, Department of Economics.
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    15. repec:hal:wpspec:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
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    More about this item

    Keywords

    Gravity model; Policy evaluation; Monte Carlo A nalysis;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • F10 - International Economics - - Trade - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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