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Controlling for heterogeneity in gravity models of trade and integration

Author

Listed:
  • I-Hui Cheng
  • Howard J. Wall
Abstract
This paper compares various specifications of the gravity model of trade as nested versions of a general specification that uses bilateral country-pair fixed effects to control for heterogeneity. For each specification, we show that the a theoretical restrictions to obtain them from the general model are not supported statistically. Because the gravity model has become the ?workhorse? baseline model for estimating the effects of international integration, this has important empirical implications. In particular, we show that, unless heterogeneity is accounted for correctly, gravity models can greatly overestimate the effects of integration on the volume of trade.

Suggested Citation

  • I-Hui Cheng & Howard J. Wall, 2004. "Controlling for heterogeneity in gravity models of trade and integration," Working Papers 1999-010, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1999-010
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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