Estimating Border Effects: The Impact of Spatial Aggregation

66 Pages Posted: 8 Apr 2016 Last revised: 21 Feb 2019

See all articles by Cletus C. Coughlin

Cletus C. Coughlin

Federal Reserve Bank of St. Louis - Research Division

Dennis Novy

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); Centre for Economic Performance (CEP); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 3 versions of this paper

Date Written: 2016-04-01

Abstract

Trade data are typically reported at the level of regions or countries and are therefore aggregates across space. In this paper, we investigate the sensitivity of standard gravity estimation to spatial aggregation. We build a model in which symmetric micro regions are aggregated into macro regions. We then apply the model to the large literature on border effects in domestic and international trade. Our theory shows that aggregation leads to border effect heterogeneity. Larger regions or countries are systematically associated with smaller border effects. The reason is that due to spatial frictions, aggregation across space increases the cost of trading within borders. The cost of trading across borders therefore appears relatively smaller. We call this mechanism the spatial attenuation effect. Even if no border frictions exist at the micro level, gravity estimation can still produce large border effects. We test our theory with trade flows at the level of U.S. states. Our results confirm the models predictions, with quantitatively strong heterogeneity patterns.

Keywords: Gravity, Geography, Borders, Trade Costs, Heterogeneity, Home Bias, Spatial Attenuation, Modifiable Areal Unit Problem (MAUP)

JEL Classification: F10, F15, R12

Suggested Citation

Coughlin, Cletus C. and Novy, Dennis, Estimating Border Effects: The Impact of Spatial Aggregation (2016-04-01). FRB St. Louis Working Paper No. 2016-6. Available at SSRN: https://ssrn.com/abstract=2760221 or http://dx.doi.org/10.20955/wp.2016.006

Cletus C. Coughlin (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Dennis Novy

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 (0) 2476150046 (Phone)

HOME PAGE: http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/novy/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
34
Abstract Views
298
PlumX Metrics