The Space of Gravity: Spatial Filtering Estimation of a Gravity Model for Bilateral Trade

Quaderni - Working Paper DSE N° 1022

30 Pages Posted: 8 Aug 2015

See all articles by Roberto Patuelli

Roberto Patuelli

University of Bologna - Department of Economics; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Gert-Jan Linders

Ministry of Social Affairs and Employmen

Rodolfo Metulini

University of Brescia - Department of Economics and Management; Scuola Superiore Sant'Anna di Pisa; IMT Institute for Advanced Studies

Daniel A. Griffith

University of Texas at Dallas - School of Economic, Political and Policy Sciences

Date Written: August 5, 2015

Abstract

Bilateral trade flows traditionally have been analysed by means of the spatial interaction gravity model. Still, (auto)correlation of trade flows has only recently received attention in the literature. This paper takes up this thread of emerging literature, and shows that spatial filtering (SF) techniques can take into account the autocorrelation in trade flows. Furthermore, we show that the use of origin and destination specific spatial filters goes a long way in correcting for omitted variable bias in an otherwise standard empirical gravity equation. For a cross-section of bilateral trade flows, we compare an SF approach to two benchmark specifications that are consistent with theoretically derived gravity. The results are relevant for a number of reasons. First, we correct for autocorrelation in the residuals. Second, we suggest that the empirical gravity equation can still be considered in applied work, despite the theoretical arguments for its misspecification due to omitted multilateral resistance terms. Third, if we include SF variables, we can still resort to any desired estimator, such as OLS, Poisson or negative binomial regression. Finally, interpreting endogeneity bias as autocorrelation in regressor variables and residuals allows for a more general specification of the gravity equation than the relatively restricted theoretical gravity equation. In particular, we can include additional country-specific push and pull variables, besides GDP (e.g., land area, landlockedness, and per capita GDP). A final analysis provides autocorrelation diagnostics according to different candidate indicators.

Keywords: bilateral trade, unconstrained gravity model, spatial filtering

JEL Classification: C14, C21, F10

Suggested Citation

Patuelli, Roberto and Linders, Gert-Jan and Metulini, Rodolfo and Griffith, Daniel A., The Space of Gravity: Spatial Filtering Estimation of a Gravity Model for Bilateral Trade (August 5, 2015). Quaderni - Working Paper DSE N° 1022, Available at SSRN: https://ssrn.com/abstract=2640867 or http://dx.doi.org/10.2139/ssrn.2640867

Roberto Patuelli (Contact Author)

University of Bologna - Department of Economics ( email )

via Anghera' 22
Rimini, 47921
Italy
+39-0541-434276 (Phone)
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HOME PAGE: http://https://sites.google.com/site/patuellihomepage/

University of Bologna - Rimini Center for Economic Analysis (RCEA)

Via Patara, 3
Rimini (RN), RN 47900
Italy

Gert-Jan Linders

Ministry of Social Affairs and Employmen ( email )

Den Haag
Netherlands

Rodolfo Metulini

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Scuola Superiore Sant'Anna di Pisa ( email )

Biblioteca Scuola Superiore Sant'Anna
Piazza Martiri della Liberta, n. 33
Pisa, 56127
Italy

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

Daniel A. Griffith

University of Texas at Dallas - School of Economic, Political and Policy Sciences ( email )

P.O. Box 830688, GR 31
Richardson, TX 75083
United States

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