A Spatial-Filtering Zero-Inflated Approach to the Estimation of the Gravity Model of Trade

Rodolfo Metulini, Roberto Patuelli () and Daniel A. Griffith
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Daniel A. Griffith: School of Economic, Political & Policy Sciences, The University of Texas at Dallas, Richardson, TX 75080, USA

Econometrics, 2018, vol. 6, issue 1, 1-15

Abstract: Nonlinear estimation of the gravity model with Poisson-type regression methods has become popular for modelling international trade flows, because it permits a better accounting for zero flows and extreme values in the distribution tail. Nevertheless, as trade flows are not independent from each other due to spatial and network autocorrelation, these methods may lead to biased parameter estimates. To overcome this problem, eigenvector spatial filtering (ESF) variants of the Poisson/negative binomial specifications have been proposed in the literature on gravity modelling of trade. However, no specific treatment has been developed for cases in which many zero flows are present. This paper contributes to the literature in two ways. First, by employing a stepwise selection criterion for spatial filters that is based on robust (sandwich) p -values and does not require likelihood-based indicators. In this respect, we develop an ad hoc backward stepwise function in R. Second, using this function, we select a reduced set of spatial filters that properly accounts for importer-side and exporter-side specific spatial effects, as well as network effects, both at the count and the logit processes of zero-inflated methods. Applying this estimation strategy to a cross-section of bilateral trade flows between a set of 64 countries for the year 2000, we find that our specification outperforms the benchmark models in terms of model fitting, both considering the AIC and in predicting zero (and small) flows.

Keywords: bilateral trade; unconstrained gravity model; eigenvector spatial filtering; zero flows; backward stepwise; zero-inflation (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Working Paper: A Spatial-Filtering Zero-Inflated Approach to the Estimation of the Gravity Model of Trade (2018)
Working Paper: A Spatial-Filtering Zero-Inflated Approach to the Estimation of the Gravity Model of Trade (2016)
Working Paper: A spatial-filtering zero-inflated approach to the estimation of the gravity model of trade (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecnmx:v:6:y:2018:i:1:p:9-:d:132749

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