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On the role of domestic trade flows for estimating the gravity model of trade

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  • Yoto V. Yotov

Abstract

The gravity equation is the workhorse model of trade. Despite solid theoretical foundations and clear gains from theory‐consistent policy analysis, there are still gaps between gravity theory and empirics. This paper focuses on domestic trade flows, and I argue that there are significant benefits from adhering to theory by estimating gravity equations with domestic (in addition to international) trade flows. I review the related literature and synthesize 15 arguments for using domestic trade flows in gravity estimations. The analysis reveals the need for further theory contributions and new data developments, and points to opportunities for more policy applications.

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  • Yoto V. Yotov, 2022. "On the role of domestic trade flows for estimating the gravity model of trade," Contemporary Economic Policy, Western Economic Association International, vol. 40(3), pages 526-540, July.
    • Handle: RePEc:bla:coecpo:v:40:y:2022:i:3:p:526-540
    DOI: 10.1111/coep.12567
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    15. Ingo Borchert & Mario Larch & Serge Shikher & Yoto V. Yotov, 2022. "Disaggregated gravity: Benchmark estimates and stylized facts from a new database," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 113-136, February.
    16. Jens Wrona, 2018. "Border Effects Without Borders: What Divides Japan's Internal Trade?," CESifo Working Paper Series 7056, CESifo.
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