Gravity Models, Trade, Panel Cointegration, Common Factors, Structural Breaks, Cross-Section Dependence
Empirical Economics, Volume 44, Issue 3, pp 1087–1111
Posted: 22 Apr 2019
Date Written: March 28, 2012
The gravity equation has been traditionally used to predict trade flows across countries. However, several problems related with its empirical application still remain unsolved. The unobserved heterogeneity, the presence of heteroskedasticity in trade data or the existence of zero flows, which make the estimation of the logarithm unfeasible, are some of them. This paper provides a survey of the most recent literature concerning the specification and estimation methods of this equation. For a dataset covering 80% of world trade, the most widely extended estimators are compared, showing that the Heckman sample selection model performs better overall for the specification of gravity equation selected.
Keywords: International Trade, Gravity Model, Estimation Methods
JEL Classification: C13, C33, F10
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