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Trade, Gravity and Aggregation

Holger Breinlich, Dennis Novy and João Santos Silva

No 721, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Gravity regressions are a common tool in the empirical international trade literature and serve an important function for many policy purposes. We study to what extent micro-level parameters can be recovered from gravity regressions estimated with aggregate data. We show that estimation of gravity equations in their original multiplicative form via Poisson pseudo maximum likelihood (PPML) is more robust to aggregation than estimation of log-linearized gravity equations via ordinary least squares (OLS). In the leading case where regressors do not vary at the micro level, PPML estimates obtained with aggregate data have a clear interpretation as trade-weighted averages of micro-level parameters that is not shared by OLS estimates. However, when regressors vary at the micro level, using disaggregated data is essential because in this case not even PPML can recover parameters of interest. We illustrate our results with an application to Baier and Bergstrand’s (2007) influential study of the effects of trade agreements on trade flows. We examine how their findings change when estimation is performed at different levels of aggregation, and explore the consequences of aggregation for predicting the effects of trade agreements.

JEL-codes: C23 C43 F14 F15 F17 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2021-09
New Economics Papers: this item is included in nep-ecm, nep-int and nep-isf
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Trade, Gravity, and Aggregation (2024) Downloads
Working Paper: Trade, gravity and aggregation (2021) Downloads
Working Paper: Trade, Gravity and Aggregation (2021) Downloads
Working Paper: Trade, gravity and aggregation (2021) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0721

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