The log of gravity revisited

By Inmaculada Martínez-Zarzoso. 2011

301 citations recorded by the source corpus.

This article evaluates the performance of alternative estimation methods for gravity models with heteroscedasticity and zero trade values. Both problematic issues, recently addressed by Santos Silva and Tenreyro in an influential paper, are re-examined here. We use Monte Carlo simulations to compare the Pseudo Poisson Maximum Likelihood (PPML) estimator recommended by Santos Silva and Tenreyro, a Gamma Pseudo-Maximum-Likelihood (GPML), a Nonlinear Least Squares (NLS) estimator and a Feasible Generalized Least Squares (FGLS) estimator with more traditional techniques. Additionally, estimates of the gravity equation are obtained for three different data sets with the abovementioned methods. The results of the simulation study indicate that, although the PPML estimator is less affected by heteroscedasticity than others are, its performance is similar, in terms of bias and SEs, to the FGLS estimator performance, in particular for small samples. GPML presents however the lowest bias and SEs in the simulations without zero values. The results of the empirical estimations, using three different samples containing real data, indicate that the choice of estimator has to be made for each specific dataset. It is highly recommended to follow a model selection approach using a number of tests to select the more appropriate estimator for any application.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/b3d5ccb1eec9711c6dbdbb4785a57dd57035dddc

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Citations in the corpus

Further Simulation Evidence on the Performance of the Poisson Pseudo-Maximum Likelihood Estimator (2011, unknown): “This issue has been addressed by Martinez-Zarzoso, Nowak-Lehmann and Vollmer (2007) and by Martin and Pham (2008) .”
On the Specification of the Gravity Model of Trade: Zeros, Excess Zeros and Zero-inflated Estimation (2009, methodology): “The renewed and extended interest in the correct econometric specification of the gravity model of trade fosters the discussion on the estimation techniques applied (Santos Silva & Tenreyro, 2006; Martinez-Zarzoso et al., 2007). Three problems often encountered when analysing bilateral trade data us”