MCMC estimation of panel gravity models in the presence of network dependence

James LeSage and Manfred Fischer

No 2018/07, Working Papers in Regional Science from WU Vienna University of Economics and Business

Abstract: Past focus in the panel gravity literature has been on multidimensional fixed effects specifications in an effort to accommodate heterogeneity. After introducing fixed effects for each origin- destination dyad and time-period speciffic effects, we find evidence of cross-sectional dependence in flows. We propose a simultaneous dependence gravity model that allows for network dependence in flows, along with computationally efficient MCMC estimation methods that produce a Monte Carlo integration estimate of log-marginal likelihood useful for model comparison. Application of the model to a panel of trade flows points to network spillover effects, suggesting the presence of network dependence and biased estimates from conventional trade flow specifications.

Keywords: origin-destination panel data flows; cross-sectional dependence; log-marginal likelihood; sociocultural distance; convex combinations of interaction matrices (search for similar items in EconPapers)
Date: 2018-10-02
New Economics Papers: this item is included in nep-geo and nep-int
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