 Bias and consistency in three-way gravity modelsMartin Weidner and Thomas Zylkin Journal of International Economics, 2021, vol. 132, issue C Abstract: We study the incidental parameter problem for the “three-way” Poisson Pseudo-Maximum Likelihood (“PPML”) estimator recently recommended for identifying the effects of trade policies and in other panel data gravity settings. Despite the number and variety of fixed effects involved, we confirm PPML is consistent for fixed T and we show it is in fact the only estimator among a wide range of PML gravity estimators that is generally consistent in this context when T is fixed. At the same time, asymptotic confidence intervals in fixed-T panels are not correctly centered at the true parameter values, and cluster-robust variance estimates used to construct standard errors are generally biased as well. We characterize each of these biases analytically and show both numerically and empirically that they are salient even for real-data settings with a large number of countries. We also offer practical remedies that can be used to obtain more reliable inferences of the effects of trade policies and other time-varying gravity variables, which we make available via an accompanying Stata package called ppml_fe_bias. Keywords: Structural gravity; Trade agreements; Asymptotic bias correction (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:132:y:2021:i:c:s0022199621000933 DOI: 10.1016/j.jinteco.2021.103513 Access Statistics for this article Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, Andrés More articles in Journal of International Economics from Elsevier |
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