Article
Transfers in the Gravity Equation
Canadian Journal of Economics
(2021)
Abstract
In this paper, we study the bilateral and aggregate effects of development
aid on trade. The paper contributes to the existing literature in three ways. First, we
provide an augmented gravity model of trade including aid as an income transfer and
allowing for bilateral effects through aid projects governed by donors. Secondly, we
provide theory-consistent estimates for aggregate and bilateral effects and estimate
the gravity equation with a state-of-the-art PPML estimator for a sample of
132 countries over the period 1995-2012. Thirdly, we provide general equilibrium
comparative statics based on our estimates. Our empirical findings suggest that 1
USD of additional foreign aid increases aggregate net imports by between 0.28 USD
and 0.36 USD. We find statistically significant bilateral effects only for countries
without a common language, colonial past or RTA. Our comparative statics suggest
that recipients benefit from income effects and terms of trade effects of aid. While
we consider the case of foreign aid, the modeling framework also applies to the study
of other transfers such as remittances.
Keywords
- foreign aid,
- gravity model,
- general equilibrium effects,
- terms of trade,
- bilateral trade and aid
Disciplines
Publication Date
Winter 2021
DOI
http://doi.org/10.1111/caje.12500
Citation Information
Hendrik W. Kruse and Inmaculada Martinez-Zarzoso. "Transfers in the Gravity Equation" Canadian Journal of Economics (2021) Available at: http://works.bepress.com/inma_martinez_zarzoso/62/
Creative Commons license
This work is licensed under a Creative Commons CC_BY-NC International License.