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Semi-mixed effects gravity models for bilateral trade

Proença, Isabel ; Sperlich, Stefan ; Savaşcı, Duygu

In: Empirical Economics, 2015, vol. 48, no. 1, p. 361-387

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    Title
    • Semi-mixed effects gravity models for bilateral trade
    Author
    • Proença, Isabel. ISEG, School of Economics and Management, Universidade de Lisboa and CEMAPRE, Rua do Quelhas, 6, 1200-781, Lisbon, Portugal
    • Sperlich, Stefan. Geneva School of Economics and Management, University of Geneva, Bd du Pont d'Arve 40, 1211, Geneva 4, Switzerland
    • Savaşcı, Duygu. IEA Data Processing and Research Center, Hamburg, Germany
    Document Type
    • Postprint
    OAI-PMH Identifier
    • oai:doc.rero.ch:332433
    Summary
    In recent years, different alternatives have been suggested to specify and estimate gravity models for bilateral trade. Presently, the so-called Poisson pseudomaximum likelihood (PPML) with log-linear index is probably the most commonly used method. A method is proposed for panel data that targets to reconcile the pros and cons of fixed and random effects models, respectively. It applies equally to two- and three-way panel models and those with country-specific time-varying effects. It allows to filter out potential correlation between observed and unobserved heterogeneity and to identify the effects of time-invariant factors. It can also be used when panels are short in time, and to other specifications than the PPML-like gamma PML, zero-inflated, or Tobit-like models. We introduce and illustrate the proposed estimator with a study of bilateral trade flows across the European Union before the recent economic crisis.