Taylor approximation of multilateral resistance term with unilateral variable in STATA
Keywords:
multilateral resistance term, Taylor expansion, gravity model, PPMLAbstract
Purpose of the article The article presents the estimation of a gravity model on a bilateral data set of 132 countries. A multilateral resistance term (MRT) is included in the gravity equation. The paper demonstrates a solution using Taylor approximation of MRT with variables that are both bilateral and unilateral.
Methodology/methods The estimation of parameters in panel data is described in this paper. A Poisson pseudo-maximum likelihood estimator (PPML) and Taylor approximation of MRT were used to estimate unknown parameters. All calculations were obtained using STATA software. Variable distance, regional trade agreements, common language and contiguity were used as gravity variables. Institutional variables were also included in the gravity model.
Scientific aim It has already become a standard routine to include typical gravity variables (distance or dummy variables of trade) into a multilateral resistance term. On the other hand, trade between two countries can also be influenced by institutional variables or by variables describing infrastructure. The aim of the paper is to estimate the gravity equation for panel data containing 132 countries over the period 2006–2015 and to include a unilateral variable into the multilateral resistance term.
Findings Although it is not possible to include a unilateral institutional variable directly into a multilateral resistance term and estimate its parameters due to problems with collinearity, this problem can be solved by using institutional distance. This variable is defined as the absolute value of the difference between the two institutional variables for the reporter and partner country. This simple procedure can be programmed, for example, in STATA.
Conclusions The common gravity variables affect the volume of trade between two countries as well as the selected institutional variables and GDP of the reporter and partner country.
References
References
Álvarez, I. C., Barbero, J., Rodríguez-Pose, A., Zofío, J. L. (2018). Does Institutional Quality Matter for Trade? Institutional Conditions in a Sectoral Trade Framework. World Development, 103, 72-87.
Anderson, J. E. (1979). Theoretical Foundation for the Gravity Equation. American Economic Review, 69(1), 106-116.
Anderson, J. & Van Wincoop, E. (2003). Gravity with Gravitas: A Solution to the Border Puzzle. The American Economic Review, 93(1), 170-192.
Arvis, J. F. & Shepherd, B. (2012). The Poisson quasi-maximum likelihood estimator: a solution to the adding up problem in gravity models. Applied Economics Letters. 20(6), 1-11.
Baier, S. L. & Bergstrand, J. H. (2009). Bonus vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation. Journal of International Economics, 77(1), 77-85. Doi: 10.1016/j.jinteco.2008.10.
Baldwin, R. & Taglioni, D. (2006). Gravity for dummies and dummies for gravity equations. NBER Working Paper No. 12516. Doi: 10.3386/w12516.
Bergrstrand, J. H. (1985). The gravity equation in international trade: some microeconomic foundations and empirical evidence. Review of Economics and Statistics, 67(3), 474-481.
Deardorff, A. (1998). Determinants of bilateral trade: Does gravity work in a neoclassical world? In: Frankel J. A. (Ed) The Regionalization of the World Economy, 1st ed.. University of Chicago Press, Chicago, pp 7-32.
Egger, P. & Nelson, D. (2011). How bad is antidumping? Evidence from panel data. The Review of Economics and Statistics, 93(4), 1374-1390.
Gil-Pareja, S., Llorca-Rivero, R. & Martínez-Serrano, J. A. (2017). Corruption and international trade: A comprehensive analysis with gravity. Working paper WPAE-2017-05, University of Valencia.
Head, K. & Mayer, T. (2014). Gravity Equations: Workhorse, Toolkit and Cookbook. In G. Gopinath, E. Helpman & K. Rogoff (Ed.), Handbook of International Economics. 131-195, Vol. 4.
Helpman, E., Melitz, M. & Rubinstein, Y. (2008). Estimating trade flows: Trading partners and trading volumes. QJ Econ 123: 441-487.
McCallum, J. (1995). National Borders Matter: Canada-U.S. Regional Trade Patterns. The American Economic Review, 85(3), 615-623.
Shepherd, B. (2013). The gravity model of international trade: a user guide. ARTNeT Gravity Modeling Initiative, United Nations, http://www.unescap. Org/sites/default/files/tipub2645.pdf.
Santos Silva, J. M. C. & Tenreyro, S. (2006). The log of gravity. The Review of Economics and Statistics, 88(4), 641-658.
Santos Silva, J. M. C. & Tenreyro, S. (2011). Further simulation evidence on the performance of the Poisson pseudo-maximum likelihood estimator. Economics Letters, 112(2), 220-222.
Tinbergen, J. (1962). Shaping the World Economy; Suggestions for an International Economic Policy. New York: Twentieth Century Fund.
Trefler, D. (1995). The case of the missing trade and other mysteries. American Economic Review, 85(5), 1029-1046.
Yu, S., Beugelsdijk, S. & de Haan, J. (2015). Trade, Trust and the Rule of Law. European Journal of Political Economy, 37, 102-115.
Downloads
Published
Issue
Section
License
One of our top priorities and responsibilities is to prevent any illegal or unethical practice. Plagiarism is not tolerated in any form. Through the submission of a manuscript, the author confirms that it is their own original research. The ethical rules are binding for all parties who participate in the conference and are published in the Conference Proceedings. All parties to the editorial process respect the Ethical Rules of Conference.
