Working Paper: NBER ID: w12516
Authors: Richard Baldwin; Daria Taglioni
Abstract: This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop's multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.
Keywords: gravity model; trade; currency unions; biases
JEL Codes: F1; F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Omission of the gravitational unconstant (C29) | Upward bias in estimated effects of currency unions on trade flows (F36) |
| Gold medal error correction (Y10) | Decrease in estimated effects of currency unions on trade flows (F36) |
| Averaging bilateral trade flows incorrectly (F14) | Bias in results (C83) |
| Bronze medal mistake (L61) | Bias in results (C83) |
| Incorrect deflation of trade values (F14) | Bias in results (C83) |