Gravity Equations; Workhorse or Trojan Horse in Explaining Trade and FDI Patterns Across Time and Space?

International Business Review, Forthcoming

29 Pages Posted: 14 Jun 2014

See all articles by Remco C. J. Zwinkels

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Sjoerd Beugelsdijk

University of Groningen

Date Written: 2010

Abstract

Gravity equations are a widely used tool in the international business literature to explain country-level trade and FDI flows. Against the background of its increased popularity and data availability, a range of commonly made econometric mistakes have recently been discussed in the literature, mostly pertaining to the (omitted) characteristics of countries or country pairs in gravity models. In this paper we complement this literature by focusing on the time-series aspects of gravity models, something that has become crucial with the increased use of panel data. Specifically, we concentrate on the possible non-stationarity of both the dependent variable (trade or FDI flows) and of one or more of the explanatory variables. In this paper we i) show that there is indeed a problem with the non-stationarity of variables commonly used in gravity equations; ii) show that not correcting for this yields overestimated results; and iii) propose an effective solution.

Keywords: Gravity equation, Trade, FDI, Time series

Suggested Citation

Zwinkels, Remco C.J. and Beugelsdijk, Sjoerd, Gravity Equations; Workhorse or Trojan Horse in Explaining Trade and FDI Patterns Across Time and Space? (2010). International Business Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2449983

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Sjoerd Beugelsdijk

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

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