Estimating the gravity model without gravity using panel data

By Joakim Westerlund, Fredrik Wilhelmsson. 2011

394 citations recorded by the source corpus.

This article examines the effects of zero trade on the estimation of the gravity model using both simulated and real data with a panel structure, which is different from the more conventional cross-sectional structure. We begin by showing that the usual log-linear estimation method can result in highly deceptive inference when some observations are zero. As an alternative approach, we suggest using the poisson fixed effects estimator. This approach eliminates the problems of zero trade, controls for heterogeneity across countries, and is shown to perform well in small samples.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/e2c9d8aaab302870bcd6133046e0636d7f2e74ea

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In Economics and Econometrics

Citations in the corpus

Effectiveness of Fiscal Incentives for R&D: Quasi-experimental Evidence (2019, methodology): “19The PPML estimator has been widely used in the empirical international trade literature (see, for example, Westerlund and Wilhelmsson (2009) and a survey by Gomez-Herrera (2013)).”
The globalization of technology in emerging markets: a gravity model on the determinants of international patent collaborations (2013, methodology): “However, in order to better understand the role of IPR strengthening, we use a fixed effects (FE) Poisson ML estimator which, with a dummy for each pair of countries, captures all the observable and non-observable factors which characterize the country-pairs and may have an impact on the propensity ”
Comparing alternative methods to estimate gravity models of bilateral trade (2010, background): “No multicollinearity problems Exclusion variables are required It provides a rationale for zero trade flows PPML (Poisson Pseudo Maximum Likelihood) It deals with the zero trade flows problem—it provides unbiased estimates in the presence of heteroskedasticity It may present limiteddependent variabl”
The Gravity Model for International Trade: Specification and Estimation Issues (2015, neutral): “As a result, a number of empirical studies of trade flows have applied the PPML estimator (see Linders et al., 2008; Martin & Pham, 2008; Burger et al., 2009; Liu, 2009; Bosquet & Boulhol, 2010; Westerlund & Wilhelmsson, 2011; MartínezZarzoso, 2013 among others).”
The international transmission of bank capital requirements: Evidence from the UK ☆ (2014, background): “In the empirical trade literature, researchers often adopt the Poisson pseudo-maximum likelihood (PPML) estimator (Santos Silva and Tenreyro, 2006, 2011; Westerlund and Wilhelmsson, 2011).”
Estimating the gravity model when zero trade flows are frequent and economically determined (2015, methodology): “We also followed the approach of SST and of Westerlund and Wilhelmsson (2011) to”