Estimating the gravity model without gravity using panel data

• Published in: Applied economics Vol. 43; no. 6; pp. 641 - 649
• Main Authors: Westerlund, Joakim, Wilhelmsson, Fredrik
• Format: Journal Article
• Language: English
• Published: London Routledge 01.03.2011; Taylor and Francis Journals; Taylor & Francis Ltd; Taylor & Francis (Routledge)
• Series: Applied Economics
• Subjects: Alternative approaches; Economic models; Economics and Business; Ekonomi och näringsliv; Estimating techniques; Estimation; Foreign trade; Gravitationsmodell; Gravity; Gravity model of trade; Gravity models; Impact analysis; International trade; Modellierung; Panel data; Poisson distribution; Poisson regression model; Samhällsvetenskap; Social Sciences; Statistical inference; Studies; trade; Trade flows; Trade models; Trade relations; Social Sciences & Humanities
• ISSN: 0003-6846; 1466-4283; 1466-4283
• DOI: 10.1080/00036840802599784

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.