Trade Potentials in Gravity Panel Data ModelsThe B.E. Journal of Economic Analysis & Policy (2005)
The paper shows how - using as an example the trade flows between eleven European countries and 31 OECD `reporting' countries - the result of a gravity model, in terms of potential trade, changes substantially when country heterogeneity and dynamics are taken into account.
Comparing the in-sample trade potential index derived from various estimators yields three different results: (a) the average trade potential index poorly represents the distribution of yearly trade potentials; (b) the index converges towards the demarcation value corresponding to the equality between observed and predicted trade flows when country heterogeneity and dynamics are taken into account; (c) the sign of its yearly average is not the right statistic with which to determine the (in)existence of unrealized trade potentials.
Finally, the index derived from a dynamic specification with multilateral fixed-effects is better able to reflect the role played by the time-variant country-specific unobservable element associated with the possible presence of positive or negative trade potentials.
- International bilateral trade,
- Gravity model,
- Trade potentials,
- Dynamic Panel Data,
- System-GMM estimator
Publication DateJanuary, 2005
Citation InformationLuca De Benedictis and Claudio Vicarelli. "Trade Potentials in Gravity Panel Data Models" The B.E. Journal of Economic Analysis & Policy Vol. 5 Iss. 1 (2005)
Available at: http://works.bepress.com/luca_de_benedictis/1/