The Importance of Dynamics in Panel Gravity Models of Trade

16 Pages Posted: 4 Apr 2002

See all articles by Maurice J. G. Bun

Maurice J. G. Bun

University of Amsterdam (UVA) - Department of Quantitative Economics; Tinbergen Institute

Franc Klaassen

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute

Date Written: April 3, 2002

Abstract

Existing gravity models of trade based on panel data are often static, that is, they only allow for contemporaneous effects of regressors on trade. However, there are numerous economic arguments suggesting that trade is a dynamic process. Hence, we extend the static model by including lags of the regressors and lags of trade. Using a panel of 221 annual bilateral OECD trade flows over 48 years, we find that dynamics are strongly significant, so that static models are misspecified. The resulting dynamic panel gravity model leads to sensible short-term and long-term trade dynamics. We also show that the simple least squares dummy variable estimator, which is typically used in static panels, yields accurate estimates for our dynamic model and outperforms the popular generalized method of moments estimator of Arellano and Bond (1991).

Keywords: Dynamic panel data model, export, gravity model, LSDV estimator, trade elasticities

JEL Classification: C13, C23, F10

Suggested Citation

Bun, Maurice J. G. and Klaassen, Franc, The Importance of Dynamics in Panel Gravity Models of Trade (April 3, 2002). Available at SSRN: https://ssrn.com/abstract=306100 or http://dx.doi.org/10.2139/ssrn.306100

Maurice J. G. Bun

University of Amsterdam (UVA) - Department of Quantitative Economics ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31-20-5254257 (Phone)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Franc Klaassen (Contact Author)

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

Roetersstraat 11
Amsterdam
Netherlands
+31 20 525 4191 (Phone)
+31 20 525 4254 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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