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Policy Measurement and Multilateral Resistance in Gravity Models

Maria Cipollina (), Luca De Benedictis (), Luca Salvatici () and Claudio Vicarelli ()

MPRA Paper from University Library of Munich, Germany

Abstract: Over the past decade, the gravity equation has emerged as the empirical workhorse in international trade to study the ex-post effects of trade policies on bilateral trade. In this paper we are concerned with the issue of how the econometric specification and the policy measurement choices can affect the goal to obtain accurate estimates of the coefficient associated with bilateral trade policies within a theoretically-consistent model. The problem is even more serious when the policy treatment is approximated through dummies as it is still often the case in the literature. Using a Monte Carlo simulation analysis, this paper shows that the use of fixed effects to control for unobserved heterogeneity leads to biased estimates of the policy impact even when the policy is measured through a continuous variable. The bias highlighted by our results is the combination of measurement error about bilateral trade costs (or preferences) and the specification used to proxy multilateral resistance terms.

Keywords: Gravity model; Multilateral trade resistance; Policy evaluation; Monte Carlo Analysis. (search for similar items in EconPapers)
JEL-codes: C10 C50 F14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2016-11
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Related works:
Working Paper: POLICY MEASUREMENT AND MULTILATERAL RESISTANCE IN GRAVITY MODELS (2016) Downloads
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