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
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)
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