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Making Gravity Great Again

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  • Martin,William J.

Abstract

The gravity model is now widely used for policy analysis and hypothesis testing, but different estimators give sharply different parameter estimates and popular estimators are likely biased because dependent variables are limited-dependent, error variances are nonconstant and missing data frequently reported as zeros. Monte Carlo analysis based on real-world parameters for aggregate trade shows that the traditional Ordinary Least Squares estimator in logarithms is strongly biased downwards. The popular Poisson Pseudo Maximum Likelihood model also suffers from downward bias. An Eaton-Kortum maximum-likelihood approach dealing with the identified sources of bias provides unbiased parameter estimates.

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  • Martin,William J., 2020. "Making Gravity Great Again," Policy Research Working Paper Series 9391, The World Bank.
    • Handle: RePEc:wbk:wbrwps:9391
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    Keywords

    International Trade and Trade Rules; Trade and Services; Economic Conditions and Volatility; Financial Sector Policy; Transport Services;
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