IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Is Gravity Linear?

Listed author(s):
  • Millimet, Daniel

    ()

    (SMU)

  • Henderson, Daniel

    ()

    (SUNY-Binghamton)

Despite the solid theoretical foundation on which the gravity model of bilateral trade is based, empirical implementation requires several assumptions which do not follow directly from the underlying theory. First, unobserved trade costs are assumed to be a (log-) linear function of observables. Second, the ad-valorem tax equivalents of trade costs are predominantly assumed to be constant across space, and to a lesser extent time. Maintaining consistency with the underlying theory, but relaxing these assumptions, we estimate gravity models ?in levels and logs ?using two data sets via nonparametric methods. The results are striking. Despite the added flexibility of the nonparametric models, parametric models based on these assumptions offer equally or more reliable in-sample forecasts (sometimes) and out-of-sample forecasts (always), particularly in the levels model. Moreover, formal statistical tests fail to reject the theoretically consistent parametric functional form. Thus, concerns in the gravity literature over functional form appear unwarranted, and estimation of the gravity model in levels is recommended.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: ftp://ftp1.economics.smu.edu/WorkingPapers/2005/millimet/hm3.pdf
Download Restriction: no

Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0517.

as
in new window

Length: 41 pages
Date of creation: 05 Apr 2006
Handle: RePEc:smu:ecowpa:0517
Contact details of provider: Postal:
Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496

Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Racine, Jeff & Li, Qi, 2004. "Nonparametric estimation of regression functions with both categorical and continuous data," Journal of Econometrics, Elsevier, vol. 119(1), pages 99-130, March.
  3. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
  4. Russell Hillberry & David Hummels, 2003. "Intranational Home Bias: Some Explanations," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1089-1092, November.
  5. Holger C. Wolf, 2000. "Intranational Home Bias In Trade," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 555-563, November.
  6. Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
  7. Howard J. Wall, 2000. "Gravity model specification and the effects of the Canada-U.S. border," Working Papers 2000-024, Federal Reserve Bank of St. Louis.
  8. 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.
  9. Guido W. Imbens, 2004. "Nonparametric Estimation of Average Treatment Effects Under Exogeneity: A Review," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 4-29, February.
  10. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
  11. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
  12. Ranjan, Priya & Tobias, Justin, 2007. "Bayesian Inference in the Gravity Model," Staff General Research Papers Archive 12721, Iowa State University, Department of Economics.
  13. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
  14. Redding, Stephen & Venables, Anthony J., 2004. "Economic geography and international inequality," Journal of International Economics, Elsevier, vol. 62(1), pages 53-82, January.
  15. Russell H. Hillberry, 2002. "Aggregation bias, compositional change, and the border effect," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 517-530, August.
  16. Hsiao, Cheng & Li, Qi & Racine, Jeffrey S., 2007. "A consistent model specification test with mixed discrete and continuous data," Journal of Econometrics, Elsevier, vol. 140(2), pages 802-826, October.
  17. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
  18. Pierre-Philippe Combes & Miren Lafourcade & Thierry Mayer, 2005. "The Trade Creating Effects of Business and Social Networks: Evidence from France," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00268768, HAL.
  19. Priya Ranjan & Justin L. Tobias, 2007. "Bayesian inference for the gravity model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(4), pages 817-838.
  20. Antoni Estevadeordal & Brian Frantz & Alan M. Taylor, 2002. "The Rise and Fall of World Trade, 1870-1939," NBER Working Papers 9318, National Bureau of Economic Research, Inc.
  21. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-481, August.
  22. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
  23. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
  24. Fratianni, Michele & Kang, Heejoon, 2006. "Heterogeneous distance-elasticities in trade gravity models," Economics Letters, Elsevier, vol. 90(1), pages 68-71, January.
  25. Pagan,Adrian & Ullah,Aman, 1999. "Nonparametric Econometrics," Cambridge Books, Cambridge University Press, number 9780521355643, May.
  26. Andrew K. Rose, 2001. "Currency unions and trade: the effect is large," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 449-461, October.
  27. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  28. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  29. Peter Hall & Jeff Racine & Qi Li, 2004. "Cross-Validation and the Estimation of Conditional Probability Densities," Journal of the American Statistical Association, American Statistical Association, vol. 99, pages 1015-1026, December.
  30. Jean-François BRUN & Céline CARRERE & Jaime MELO DE & Patrick GUILLAUMONT, 2002. "Has Distance Died? Evidence from a Panel Gravity Model," Working Papers 200215, CERDI.
  31. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  32. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-623, June.
  33. Daniel L. Millimet & Thomas Osang, 2007. "Do state borders matter for U.S. intranational trade? The role of history and internal migration," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 93-126, February.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Is gravity linear? (JAE 2008) in ReplicationWiki

When requesting a correction, please mention this item's handle: RePEc:smu:ecowpa:0517. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ömer Özak)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.