EconPapers    
Economics at your fingertips  
 

The log of gravity

João Santos Silva () and Silvana Tenreyro ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Although economists have long been aware of Jensen's inequality, many econometric applications have neglected an important implication of it: the standard practice of interpreting the parameters of log-linearized models estimated by ordinary least squares as elasticities can be highly misleading in the presence of heteroskedasticity. This paper explains why this problem arises and proposes an appropriate estimator. Our criticism to conventional practices and the solution we propose extends to a broad range of economic applications where the equation under study is log-linearized. We develop the argument using one particular illustration, the gravity equation for trade, and apply the proposed technique to provide new estimates of this equation. We find significant differences between estimates obtained with the proposed estimator and those obtained with the traditional method. These discrepancies persist even when the gravity equation takes into account multilateral resistance terms or fixed effects

Keywords: Elasticities; Gravity equation; Heteroskedasticity; Jensen's inequality; Poisson regression; Preferential-trade agreements (search for similar items in EconPapers)
JEL-codes: F10 F11 F15 C13 F12 C21 (search for similar items in EconPapers)
Date: 2005-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)
http://eprints.lse.ac.uk/3744/ Open access version. (application/pdf)

Related works:
Journal Article: The Log of Gravity (2006) Downloads
Working Paper: The Log of Gravity (2005) Downloads
Working Paper: The Log of Gravity (2005) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:3744

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().

 
Page updated 2019-09-14
Handle: RePEc:ehl:lserod:3744