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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

See all articles by Estrella Gomez-Herrera

Estrella Gomez-Herrera

Joint Research Center of the European Commission; University of Balearic Islands

Date Written: March 28, 2012

Abstract

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

Suggested Citation

Gomez-Herrera, Estrella, Gravity Models, Trade, Panel Cointegration, Common Factors, Structural Breaks, Cross-Section Dependence (March 28, 2012). Empirical Economics, Volume 44, Issue 3, pp 1087–1111, Available at SSRN: https://ssrn.com/abstract=3358373

Estrella Gomez-Herrera (Contact Author)

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
1049
Belgium

University of Balearic Islands ( email )

Crta Valldemossa km. 7,5
Palma de Mallorca, Islas Baleares / Illes Balears 07003
Spain

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