The role of socio-cultural factors in static trade panel models

Manfred Fischer and James LeSage

No 2018/04, Working Papers in Regional Science from WU Vienna University of Economics and Business

Abstract: The focus is on cross-sectional dependence in panel trade flow models. We propose alternative specifications for modeling time invariant factors such as socio-cultural indicator variables, e.g., common language and currency. These are typically treated as a source of heterogeneity eliminated using fixed effects transformations, but we find evidence of cross-sectional dependence after eliminating country-specific effects. These findings suggest use of alternative simultaneous dependence model specifications that accommodate cross-sectional dependence, which we set forth along with Bayesian estimation methods. Ignoring cross-sectional dependence implies biased estimates from panel trade flow models that rely on fixed effects.

Keywords: Bayesian; MCMC estimation; socio-cultural distance; origin-destination flows; treatment of time invariant variables; panel models (search for similar items in EconPapers)
Date: 2018-05-17
New Economics Papers: this item is included in nep-knm
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