Controlling for Multilateral Resistance Terms in Linearized Trade Gravity Equations Without Spatial Econometrics

Abstract

This paper studies linearized spatial structural gravity models of bilateral trade à la Behrens, Ertur and Koch (2012). We show that these models do in fact not require spatial econometric methods for estimation. This result follows from the nature of the specific spatial weights matrix, and from the exporter- or importer-specific nature of some regressors and the approximation error. All structural model parameters are identified from a linear regression that uses a spatial lag of the dependent variable as a control function.

Keywords: Gravity models, Multilateral resistance, Spatial models

JEL Classification: F1, C23