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Modelling multilateral trade resistance in a gravity model with exchange rate regimes

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  • Christopher Adam
  • David Cobham

Abstract

In estimating a gravity model it is essential to analyse not just bilateral trade resistance, the barriers to trade between a pair of countries, but also multilateral trade resistance (MTR), the barriers to trade that each country faces with all its trading partners. Without correctly modelling MTR, it is impossible either to obtain accurate estimates of the effects on trade of exchange rate regimes and other variables or to perform accurate counterfactual simulations of trade patterns under other assumptions about exchange rate regimes or other variables. In this paper we implement a number of different ways of modelling MTR ?both for a standard gravity model and for an extended model which includes a full range of bilateral exchange rate regimes ?notably several variants of the technique developed by Baier and Bergstrand (2006), which turn out to produce broadly similar results. We then illustrate our preferred approach by carrying out simulations of the effects of the creation of an East African currency union and the effects of a withdrawal from EMU by Italy.

Suggested Citation

  • Christopher Adam & David Cobham, 2007. " Modelling multilateral trade resistance in a gravity model with exchange rate regimes," CDMA Conference Paper Series 0702, Centre for Dynamic Macroeconomic Analysis.
    • Handle: RePEc:san:cdmacp:0702
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    File URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0702.pdf
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    Cited by:

    1. Juyoung Cheong & Do Won Kwak & Kam Ki Tang, 2013. "WTO Trade Effects and Identification Problems: Why Knowing The Structural Properties of WTO Memberships Matters?," Discussion Papers Series 491, School of Economics, University of Queensland, Australia.
    2. Mireille NTSAMA ETOUNDI, 2014. "Impact de la rente pétrolière sur la demande des pays frontaliers du Cameroun," Working Papers 201417, CERDI.
    3. Hanh Vu Thi, 2015. "Essays on the Export Performance of Vietnam/Essais sur la Performance à l'Exportation du Vietnam," ULB Institutional Repository 2013/216765, ULB -- Universite Libre de Bruxelles.
    4. Ernest MIGUELEZ, 2014. "Inventor diasporas and the internationalization of technology," Cahiers du GREThA 2014-12, Groupe de Recherche en Economie Théorique et Appliquée.
    5. Libman, Alexander & Herrmann-Pillath, Carsten & Yadav, Gaurav, 2013. "Are human rights and economic well-being substitutes? The evidence from migration patterns across the Indian states," European Journal of Political Economy, Elsevier, vol. 31(C), pages 139-164.

    More about this item

    Keywords

    gravity; geography; trade; exchange rate regime; currency union; transactions costs; multilateral trade resistance.;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

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