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Is Gravity Linear?

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Author Info
Millimet, Daniel () (SMU)
Henderson, Daniel () (SUNY-Binghamton)

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Abstract

Despite the solid theoretical foundation on which the gravity model of bilateral trade is based, empirical implementation requires several assumptions which do not follow directly from the underlying theory. First, unobserved trade costs are assumed to be a (log-) linear function of observables. Second, the ad-valorem tax equivalents of trade costs are predominantly assumed to be constant across space, and to a lesser extent time. Maintaining consistency with the underlying theory, but relaxing these assumptions, we estimate gravity models ?in levels and logs ?using two data sets via nonparametric methods. The results are striking. Despite the added flexibility of the nonparametric models, parametric models based on these assumptions offer equally or more reliable in-sample forecasts (sometimes) and out-of-sample forecasts (always), particularly in the levels model. Moreover, formal statistical tests fail to reject the theoretically consistent parametric functional form. Thus, concerns in the gravity literature over functional form appear unwarranted, and estimation of the gravity model in levels is recommended.

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Publisher Info
Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0517.

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Length: 41 pages
Date of creation: 05 Apr 2006
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Handle: RePEc:smu:ecowpa:0517

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Fax: 214-768-1821
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Related research
Keywords: Gravity Model; Bilateral Trade; Border Effect; Currency Union; Generalized Kernel Estimation;

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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
F14 - International Economics - - Trade - - - Country and Industry Studies of Trade

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yilmazkuday, Hakan, 2009. "Understanding Interstate Trade Patterns," MPRA Paper 15952, University Library of Munich, Germany. [Downloadable!]
  2. Bas Straathof, 2008. "Gravity with Gravitas: Comment," CPB Discussion Papers 111, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  3. Mitze, Timo & Alecke, Björn & Untiedt, Gerhard, 2008. "Trade, FDI and Cross-Variable Linkages: A German (Macro-)Regional Perspective," MPRA Paper 12245, University Library of Munich, Germany. [Downloadable!]
  4. Yilmazkuday, Hakan, 2009. "Is the Armington Elasticity Really Constant across Importers?," MPRA Paper 15954, University Library of Munich, Germany. [Downloadable!]
  5. Laura Márquez-Ramos & Inmaculada Martínez-Zarzoso & Celestino Suárez-Burguet, 2007. "The Role of Distance in Gravity Regressions: Is There Really a Missing Globalisation Puzzle?," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 7(1), pages 1557-1557. [Downloadable!] (restricted)
  6. Gabriel J Felbermayr & Benjamin Jung & Farid Toubal, 2009. "Ethnic Networks, Information, and International Trade: Revisiting the Evidence," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 306/2009, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  7. Timo Mitze & Björn Alecke & Gerhard Untiedt, 2009. "Trade-FDI Linkages in a System of Gravity Equations for German Regional Data," Ruhr Economic Papers 0084, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
  8. KOCH, Wilfried & ERTUR, Cem & BEHRENS, Kristian, 2007. "Dual gravity : Using spatial econometrics to control for multilateral resistance," LEG - Document de travail - Economie 2007-03, LEG, Laboratoire d'Economie et de Gestion, CNRS UMR 5118, Université de Bourgogne. [Downloadable!]
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  9. Timo Mitze, 2009. "Endogeneity in Panel Data Models with Time-Varying and Time-Fixed Regressors: To IV or not IV?," Ruhr Economic Papers 0083, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
  10. Jayjit Roy, 2008. "Do Customs Union Members Engage In More Bilateral Trade Than Free Trade Agreement Members?," Departmental Working Papers 0803, Southern Methodist University, Department of Economics. [Downloadable!]
  11. Chintrakarn, Pandej & Millimet, Daniel, 2006. "Subnational Trade Flows and State-Level Energy Intensity," Departmental Working Papers 0601, Southern Methodist University, Department of Economics. [Downloadable!]
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