Gravity Model Specification and the Effects of the Canada-U.S. Border
FRB of St. Louis Working Paper No. 2000-024A
23 Pages Posted: 2 Jan 2001
Date Written: July 2000
Abstract
There is a well-established literature finding that the Canada-U.S. border has a large dampening effect on trade, is asymmetric, and differs across provinces. In this paper, I demonstrate that the standard gravity model used to obtain these results provides biased estimates of the volume of trade. I attribute this to heterogeneity bias and reestimate the effects of the border using a gravity model that allows for heterogeneous gravity equations. Doing so does not alter the general results of existing studies, although it does yield a border effect that is 40 percent larger, reverses the border's asymmetry, and indicates very different provincial effects.
Keywords: border effect, home bias
JEL Classification: F14, F15, R10
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
One Money, One Market: Estimating the Effect of Common Currencies on Trade
-
Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?
-
Does a Currency Union Affect Trade? The Time Series Evidence
By Reuven Glick and Andrew Kenan Rose
-
Does a Currency Union Affect Trade? The Time Series Evidence
By Reuven Glick and Andrew Kenan Rose
-
On Theories Explaining the Success of the Gravity Equation
By Simon J. Evenett and Wolfgang Keller
-
Estimating Trade Flows: Trading Partners and Trading Volumes
By Elhanan Helpman, Marc J. Melitz, ...
-
An Estimate of the Effect of Common Currencies on Trade and Income