Gravity for Dummies and Dummies for Gravity Equations

Richard Baldwin and Daria Taglioni ()

No 5850, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: country dummies; gravity equation; pair dummies (search for similar items in EconPapers)
JEL-codes: F10 F33 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2006-09
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Working Paper: Gravity for Dummies and Dummies for Gravity Equations (2006)
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