Structural Gravity and Fixed Effects

27 Pages Posted: 1 Jun 2015 Last revised: 18 Jun 2023

Date Written: May 2015

Abstract

The gravity equation for trade flows is one of the most successful empirical models in economics and has long played a central role in the trade literature (Anderson, 2011). Different approaches to estimate the gravity equation, i.e. reduced-form or more structural, have been proposed. This paper examines the role of adding-up constraints as the key difference between structural gravity with "multilateral resistance" indexes and reduced-form gravity with simple fixed effects by exporter and importer. In particular, estimating gravity equations using the Poisson Pseudo-Maximum-Likelihood Estimator (Poisson PML) with fixed effects automatically satisfies these constraints and is consistent with the introduction of "multilateral resistance" indexes as in Anderson and van Wincoop (2003).

Suggested Citation

Fally, Thibault, Structural Gravity and Fixed Effects (May 2015). NBER Working Paper No. w21212, Available at SSRN: https://ssrn.com/abstract=2612747

Thibault Fally (Contact Author)

UC Berkeley - ARE Department ( email )

Berkeley, CA 94720
United States

HOME PAGE: http://are.berkeley.edu/~fally/

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