Working Paper: NBER ID: w21212
Authors: Thibault Fally
Abstract: The gravity equation for trade flows is one of the most successful empirical models in economics and has long played a central role in the trade literature (Anderson, 2011). Different approaches to estimate the gravity equation, i.e. reduced-form or more structural, have been proposed. This paper examines the role of adding-up constraints as the key difference between structural gravity with "multilateral resistance" indexes and reduced-form gravity with simple fixed effects by exporter and importer. In particular, estimating gravity equations using the Poisson Pseudo-Maximum-Likelihood Estimator (Poisson PML) with fixed effects automatically satisfies these constraints and is consistent with the introduction of "multilateral resistance" indexes as in Anderson and van Wincoop (2003).
Keywords: gravity equation; trade flows; Poisson PML; fixed effects; multilateral resistance indexes
JEL Codes: C13; C50; F10; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Poisson PML (C59) | accurate trade flow predictions (F17) |
| multilateral resistance indexes (C43) | trade flows (F10) |
| Poisson PML with fixed effects (C23) | consistent estimates of trade flows (F14) |
| OLS and Gamma PML (C69) | biased estimates of trade flows (F14) |
| structural gravity framework (F12) | not satisfied with OLS or Gamma PML (C59) |