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Gravity model specification and the effects of the Canada-U.S. border

Howard Wall ()

No 2000-024, Working Papers from Federal Reserve Bank of St. Louis

Abstract: There is a well-established literature finding that the Canada-U.S. border has a large dampening effect on trade, is asymmetric, and differs across provinces. In this paper, I demonstrate that the standard gravity model used to obtain these results provides biased estimates of the volume of trade. I attribute this to heterogeneity bias and reestimate the effects of the border using a gravity model that allows for heterogeneous gravity equations. Doing so does not alter the general results of existing studies, although it does yield a border effect that is 40 percent larger, reverses the border's asymmetry, and indicates very different provincial effects.

Keywords: Canada; North American Free Trade Agreement (search for similar items in EconPapers)
Date: 2000
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