IDEAS home Printed from https://ideas.repec.org/p/edn/esedps/105.html
   My bibliography  Save this paper

Gravity Models of the Intra-EU Trade: Application of the Hausman-Taylor Estimation in Heterogeneous Panels with Common Time-specific Factors

Author

Abstract

In this paper we follow recent developments of panel data studies and explicitly allow for the existence of unobserved common time-specific factors where their individual responses are also allowed to be heterogeneous across cross section units. In the context of this extended panel data framework we generalize the Hausman-Taylor estimation methodology and develop the associated econometric theory. We apply our proposed estimation technique along with the conventional panel data approaches to a comprehensive analysis of the gravity equation of bilateral trade flows amongst the 15 European countries over 1960-2001. Empirical results clearly demonstrate that our proposed approach fits the data reasonably well and provides much more sensible results than the conventional approach based on the fixed time dummies. These findings may highlight the importance of allowing for a certain degree of cross section dependence through unobserved heterogeneous time specific common effects, otherwise the resulting estimates would be severely biased.

Suggested Citation

  • Laura Serlenga & Yongcheol Shin, 2004. "Gravity Models of the Intra-EU Trade: Application of the Hausman-Taylor Estimation in Heterogeneous Panels with Common Time-specific Factors," Edinburgh School of Economics Discussion Paper Series 105, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:105
    as

    Download full text from publisher

    File URL: http://www.econ.ed.ac.uk/papers/id105_esedps.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Frankel, Jeffrey A. & Wei, Shang-Jin, 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers 233209, University of California-Berkeley, Department of Economics.
    2. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    3. Egger, Peter, 2004. "On the Problem of Endogenous Unobserved Effects in the Estimation of Gravity Models," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 19, pages 182-191.
    4. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, May.
    5. Vinhas de Souza, Lúcio, 2002. "Trade effects of monetary integration in large, mature economies: a primer on the European Monetary Union," Kiel Working Papers 1137, Kiel Institute for the World Economy (IfW Kiel).
    6. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    7. Alan V. Deardorff, 2011. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," World Scientific Book Chapters, in: Robert M Stern (ed.), Comparative Advantage, Growth, And The Gains From Trade And Globalization A Festschrift in Honor of Alan V Deardorff, chapter 24, pages 267-293, World Scientific Publishing Co. Pte. Ltd..
    8. Jean-François Brun & Céline Carrère & Patrick Guillaumont & Jaime de Melo, 2015. "Has Distance Died? Evidence from a Panel Gravity Model," World Scientific Book Chapters, in: Developing Countries in the World Economy, chapter 13, pages 299-320, World Scientific Publishing Co. Pte. Ltd..
    9. László Mátyás & László Kónya & Mark N. Harris, 2000. "Modelling Export Activity of Eleven APEC Countries," Melbourne Institute Working Paper Series wp2000n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    10. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-153, February.
    11. Martinez-Zarzoso, Inmaculada & Nowak-Lehmann, Felicitas, 2003. "Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows," Journal of Applied Economics, Universidad del CEMA, vol. 6(2), pages 1-26, November.
    12. Bougheas, Spiros & Demetriades, Panicos O. & Morgenroth, Edgar L. W., 1999. "Infrastructure, transport costs and trade," Journal of International Economics, Elsevier, vol. 47(1), pages 169-189, February.
    13. Bergstrand, Jeffrey H, 1990. "The Heckscher-Ohlin-Samuelson Model, the Linder Hypothesis and the Determinants of Bilateral Intra-industry Trade," Economic Journal, Royal Economic Society, vol. 100(403), pages 1216-1229, December.
    14. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
    15. Amemiya, Takeshi & MaCurdy, Thomas E, 1986. "Instrumental-Variable Estimation of an Error-Components Model," Econometrica, Econometric Society, vol. 54(4), pages 869-880, July.
    16. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
    17. Egger, Peter, 2000. "A note on the proper econometric specification of the gravity equation," Economics Letters, Elsevier, vol. 66(1), pages 25-31, January.
    18. David Hummels & James Levinsohn, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 799-836.
    19. Simon J. Evenett & Wolfgang Keller, 2002. "On Theories Explaining the Success of the Gravity Equation," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 281-316, April.
    20. Deardorff, Alan V., 1984. "Testing trade theories and predicting trade flows," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 10, pages 467-517, Elsevier.
    21. Peter Egger & Michael Pfaffermayr, 2003. "The proper panel econometric specification of the gravity equation: A three-way model with bilateral interaction effects," Empirical Economics, Springer, vol. 28(3), pages 571-580, July.
    22. Jacquemin, Alexis & Sapir, André, 1990. "Competition and Imports in the European Market," CEPR Discussion Papers 474, C.E.P.R. Discussion Papers.
    23. Josef C. Brada & José A. Méndez, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Wiley Blackwell, vol. 41(2), pages 263-280, May.
    24. Peter C.B.Phillips & Donggyu Sul, 2002. "Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence," Cowles Foundation Discussion Papers 1362, Cowles Foundation for Research in Economics, Yale University.
    25. Markusen, James R & Wigle, Randall M, 1990. "Explaining the Volume of North-South Trade," Economic Journal, Royal Economic Society, vol. 100(403), pages 1206-1215, December.
    26. Ahn, Seung Chan & Hoon Lee, Young & Schmidt, Peter, 2001. "GMM estimation of linear panel data models with time-varying individual effects," Journal of Econometrics, Elsevier, vol. 101(2), pages 219-255, April.
    27. Paul Grauwe & Frauke Skudelny, 2000. "The impact of EMU on trade flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(3), pages 381-402, September.
    28. repec:bla:kyklos:v:41:y:1988:i:2:p:263-80 is not listed on IDEAS
    29. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
    30. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yongcheol Shin & Laura Serlenga, 2007. "Gravity models of intra-EU trade: application of the CCEP-HT estimation in heterogeneous panels with unobserved common time-specific factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 361-381.
    2. Simone Juhasz Silva & Douglas Nelson, 2012. "Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model," The World Economy, Wiley Blackwell, vol. 35(5), pages 545-577, May.
    3. Sierra-Fernández, Mª Del Pilar & Martínez-Campillo, Almudena, 2009. "Impacto del proceso de integración europea sobre las exportaciones de Castilla y León (1993-2007): un análisis econométrico a partir de la ecuación de gravedad/The Impact of the European Integration P," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 27, pages 783(34á)-78, Diciembre.
    4. Muhammad Ullah & Kazuo Inaba, 2012. "Impact of RTA and PTA on Bangladesh’s Export: Application of a Gravity Model," Journal of Industry, Competition and Trade, Springer, vol. 12(4), pages 445-460, December.
    5. Estrella Gómez-Herrera, 2013. "Comparing alternative methods to estimate gravity models of bilateral trade," Empirical Economics, Springer, vol. 44(3), pages 1087-1111, June.
    6. Martínez-Zarzoso, Inmaculada & Felicitas, Nowak-Lehmann D. & Horsewood, Nicholas, 2009. "Are regional trading agreements beneficial?: Static and dynamic panel gravity models," The North American Journal of Economics and Finance, Elsevier, vol. 20(1), pages 46-65, March.
    7. Kareem, Fatima Olanike & Martinez-Zarzoso, Inmaculada & Brümmer, Bernhard, 2016. "Fitting the Gravity Model when Zero Trade Flows are Frequent: a Comparison of Estimation Techniques using Africa's Trade Data," GlobalFood Discussion Papers 230588, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    8. Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
    9. Almudena Martinez-Campillo & Mª del Pilar Sierra-Fernández, 2012. "Impact of European Integration Process in Spain," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 57-80.
    10. Lionel Fontagné & Michaël Pajot & Jean-Michel Pasteels, 2002. "Potentiels de commerce entre économies hétérogènes : un petit mode d'emploi des modèles de gravité," Economie & Prévision, La Documentation Française, vol. 0(1), pages 115-139.
    11. Yilmazkuday, Hakan, 2009. "How Important is Technology? A Counterfactual Analysis," MPRA Paper 16838, University Library of Munich, Germany.
    12. Zhang, Daowei & Li, Yanshu, 2009. "Forest endowment, logging restrictions, and China's wood products trade," China Economic Review, Elsevier, vol. 20(1), pages 46-53, March.
    13. Sally Milton & M A B Siddique, 2014. "Trade Creation and Diversion Under the Thailand-Australia Free Trade Agreement (TAFTA)," Economics Discussion / Working Papers 14-26, The University of Western Australia, Department of Economics.
    14. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D. & Nicholas Horsewood, 2006. "Effects of Regional Trade Agreements Using a Static and Dynamic Gravity Equation," Ibero America Institute for Econ. Research (IAI) Discussion Papers 149, Ibero-America Institute for Economic Research.
    15. Juliette Milgram, 2003. "Quantitative Restrictions on Clothing Imports: Impact and Determinants of the Common Trade Policy Towards Developing Countries," Economic Working Papers at Centro de Estudios Andaluces E2003/04, Centro de Estudios Andaluces.
    16. Yilmazkuday, Hakan, 2009. "Distribution of Consumption, Production and Trade within the U.S," MPRA Paper 16361, University Library of Munich, Germany.
    17. Huang, Rocco R., 2007. "Distance and trade: Disentangling unfamiliarity effects and transport cost effects," European Economic Review, Elsevier, vol. 51(1), pages 161-181, January.
    18. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann, 2003. "Augmented Gravity Model: An Empirical Application to Mercosur-European Union Trade Flows," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 291-316, November.
    19. Caporale, Guglielmo Maria & Sova, Anamaria & Sova, Robert, 2015. "Trade flows and trade specialisation: The case of China," China Economic Review, Elsevier, vol. 34(C), pages 261-273.
    20. Ambetsa Wycliffe Oparanya & Kenneth P. Mdadila & Longinus K. Rutasitara, 2019. "The Determinant of Bilateral Trade in the East African Community: Application of the Gravity Model," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(4), pages 1-15, April.

    More about this item

    Keywords

    gravity models of trade; heterogeneous panel data; hausman-taylor estimation; time-specific common factors; intra-EU trade;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:edn:esedps:105. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Research Office (email available below). General contact details of provider: https://edirc.repec.org/data/deediuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.