Abstract
In this study we compare the traditional OLS approach applied to the log-linear form of the gravity model with the Poisson Quasi Maximum Likelihood (PQML) estimation procedure applied to the non-linear multiplicative specification of the gravity model. We use the trade flows for all products, for all manufacturing products as well as for manufacturing products broken down by three-digit ISIC Rev.2 categories. We base our conclusions on the gravity model of Bergstrand (Rev Econ Stat 71(1):143--153, 1989) for disaggregate trade flows that allows us to investigate differences in factor-proportions and home-market effects at the industry level. In addition, we compare the effects of other explanatory variables such as exporter and importer total income, distance, preferential trade agreements, common border, historical ties, and common language on the volume of trade. Our main conclusion is that both estimation results as well as results of the regression mis-specification tests provide supporting evidence for the PQML estimation approach over the OLS estimation method.
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The paper has benefited from comments by an anonymous referee and by the participants at the following conferences: the 4th Nordic Econometrics Meeting, Tartu, Estonia, the 8th Annual Conference of the European Trade Study Group (ETSG), Vienna, Austria, the 21th Annual Congress of the European Economic Association (EEA), Vienna, Austria, the XIth Spring Meeting of Young Economists (SMYE), Sevilla, Spain, and the 5th Annual Conference of the European Economics and Finance Society (EEFS), Heraklion, Greece.
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Siliverstovs, B., Schumacher, D. Estimating gravity equations: to log or not to log?. Empir Econ 36, 645–669 (2009). https://doi.org/10.1007/s00181-008-0217-y
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DOI: https://doi.org/10.1007/s00181-008-0217-y