Gravity for Dummies and Dummies for Gravity Equations

27 Pages Posted: 16 Nov 2006

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Daria Taglioni

World Bank, Development Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

Abstract

This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop's multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.

Keywords: Country dummies, gravity equation, pair dummies

JEL Classification: F10, F33, F4

Suggested Citation

Baldwin, Richard E. and Taglioni, Daria, Gravity for Dummies and Dummies for Gravity Equations (September 2006). CEPR Discussion Paper No. 5850, Available at SSRN: https://ssrn.com/abstract=945443

Richard E. Baldwin (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
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+41 22 908 5933 (Phone)
+41 22 733 3049 (Fax)

HOME PAGE: http://www.hei.unige.ch/~baldwin/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daria Taglioni

World Bank, Development Economics ( email )

Washington, DC 20433
United States

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