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  

Howard J. Wall

Lindenwood University - Center for Economics and the Environment

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

Wall, Howard J., Gravity Model Specification and the Effects of the Canada-U.S. Border (July 2000). FRB of St. Louis Working Paper No. 2000-024A. Available at SSRN: https://ssrn.com/abstract=249011 or http://dx.doi.org/10.2139/ssrn.249011

Howard J. Wall (Contact Author)

Lindenwood University - Center for Economics and the Environment ( email )

209 S. Kingshighway
St. Charles, MO 63301
United States

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