Estimating the Gravity Model When Zero Trade Flows are Frequent and Economically Determined

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dc.creatorPham, Cong S.
dc.creatorMartin, Will
dc.date2015-07-16T18:24:18Z
dc.date2015-07-16T18:24:18Z
dc.date2015-06
dc.date.accessioned2026-07-01T00:49:59Z
dc.descriptionThis paper evaluates the performance of alternative estimators of the gravity equation when zero trade flows result from economically-based data-generating processes with heteroscedastic residuals and potentially-omitted variables. In a standard Monte Carlo analysis, the paper finds that this combination can create seriously biased estimates in gravity models with frequencies of zero frequently observed in real-world data, and that Poisson Pseudo-Maximum-Likelihood models can be important in solving this problem. Standard threshold–Tobit estimators perform well in a Tobit-based data-generating process only if the analysis deals with the heteroscedasticity problem. When the data are generated by a Heckman sample selection model, the Zero-Inflated Poisson model appears to have the lowest bias. When the data are generated by a Helpman, Melitz, and Rubinstein-type model with heterogeneous firms, a Zero-Inflated Poisson estimator including firm numbers appears to provide the best results. Testing on real-world data for total trade throws up additional puzzles with truncated Poisson Pseudo-Maximum-Likelihood and Poisson Pseudo-Maximum-Likelihood estimators being very similar, and Zero-Inflated Poisson and truncated Poisson Pseudo-Maximum-Likelihood identical. Repeating the Monte Carlo analysis taking into account the high frequency of very small predicted trade flows in real-world data reconciles these findings and leads to specific recommendations for estimators.
dc.formatapplication/pdf
dc.formattext/plain
dc.identifierhttp://documents.worldbank.org/curated/en/2015/06/24641545/estimating-gravity-model-zero-trade-flows-frequent-economically-determined
dc.identifierhttps://hdl.handle.net/10986/22182
dc.identifierhttps://doi.org/10.1596/1813-9450-7308
dc.identifier.urihttp://hdl.handle.net/123456789/411686
dc.languageEnglish
dc.languageen_US
dc.publisherWorld Bank, Washington, DC
dc.relationPolicy Research Working Paper;No. 7308
dc.rightsCC BY 3.0 IGO
dc.rightshttp://creativecommons.org/licenses/by/3.0/igo/
dc.rightsWorld Bank
dc.subjectPANEL DATA
dc.subjectVARIABILITY
dc.subjectREGRESSION MODEL
dc.subjectMINIMIZATION
dc.subjectERRORS
dc.subjectBINOMIAL DISTRIBUTION
dc.subjectCOEFFICIENTS
dc.subjectLIMITED DEPENDENT VARIABLE
dc.subjectNORMAL DISTRIBUTION
dc.subjectDUMMY VARIABLES
dc.subjectGDP PER CAPITA
dc.subjectINFORMATION
dc.subjectLINEAR FUNCTION
dc.subjectEXPORTS
dc.subjectELASTICITY
dc.subjectTRADE FLOWS
dc.subjectLOGARITHMS
dc.subjectDISTRIBUTION
dc.subjectGRAVITY MODEL
dc.subjectVARIABLES
dc.subjectDEGREES OF FREEDOM
dc.subjectECONOMETRIC METHODS
dc.subjectNONLINEARITY
dc.subjectEXOGENOUS REGRESSORS
dc.subjectNONLINEAR MODELS
dc.subjectDUMMY VARIABLE
dc.subjectNUMBER OF OBSERVATIONS
dc.subjectPROBABILITIES
dc.subjectPREFERENTIAL ACCESS
dc.subjectINDEPENDENT VARIABLES
dc.subjectCLASSIFICATIONS
dc.subjectVARIABLE ESTIMATION
dc.subjectKNOWLEDGE
dc.subjectEMPIRICAL ANALYSIS
dc.subjectBIASES
dc.subjectMONTE CARLO SIMULATION
dc.subjectGOODNESS OF FIT
dc.subjectSTANDARD DEVIATION
dc.subjectDATA
dc.subjectMAXIMUM LIKELIHOOD
dc.subjectSTEP ESTIMATOR
dc.subjectLAY OUT
dc.subjectEXOGENOUS VARIABLES
dc.subjectTRADE BLOCS
dc.subjectDECISION TREE
dc.subjectPROBABILITY
dc.subjectNOTATION
dc.subjectLINEAR MODELS
dc.subjectECONOMETRICS
dc.subjectCLUSTERING
dc.subjectSTANDARD ERRORS
dc.subjectCASES
dc.subjectCRITERIA
dc.subjectLINEAR PROBABILITY
dc.subjectMATRIX
dc.subjectEXPLANATORY VARIABLES
dc.subjectPOSITIVE OBSERVATIONS
dc.subjectACCESS
dc.subjectINDICATORS
dc.subjectRESEARCH
dc.subjectARTICLE
dc.subjectLIKELIHOOD FUNCTION
dc.subjectECONOMETRIC PROBLEMS
dc.subjectLARGE NUMBER
dc.subjectVOLUME OF TRADE
dc.subjectRANDOM VARIABLES
dc.subjectGRAVITY EQUATION
dc.subjectECONOMIC RESEARCH
dc.subjectERROR VARIANCE
dc.subjectSELECTION MODEL
dc.subjectLIMITED DEPENDENT VARIABLES
dc.subjectMODEL RESULTS
dc.subjectECONOMIC SURVEYS
dc.subjectINTERNATIONAL TRADE
dc.subjectECONOMETRIC ANALYSIS
dc.subjectVALIDITY
dc.subjectDESCRIPTION
dc.subjectVALUE
dc.subjectDEPENDENT VARIABLE
dc.subjectPOISSON DISTRIBUTION
dc.subjectDISTRIBUTION FUNCTION
dc.subjectLIKELIHOOD RATIO
dc.subjectERROR TERMS
dc.subjectGAMMA DISTRIBUTION
dc.subjectINDEX
dc.subjectCOEFFICIENT VECTOR
dc.subjectEXPECTED VALUE
dc.subjectDEPENDENT VARIABLES
dc.subjectRESEARCHERS
dc.subjectAGRICULTURE
dc.subjectCORRELATION
dc.subjectEQUATIONS
dc.subjectSTANDARD NORMAL DISTRIBUTION
dc.subjectSAMPLES
dc.subjectERROR TERM
dc.subjectMEASUREMENT
dc.subjectECONOMIC THEORY
dc.subjectCONSTANT VARIANCE
dc.subjectASYMPTOTICALLY EQUIVALENT
dc.subjectSURVEYS
dc.subjectECONOMICS
dc.subjectECONOMIC MODELS
dc.subjectCASE
dc.subjectLOG-LIKELIHOOD FUNCTION
dc.subjectHETEROSCEDASTICITY
dc.subjectINTEGER VALUES
dc.subjectFIXED EFFECTS
dc.subjectFUNCTIONAL FORMS
dc.subjectJOURNAL OF ECONOMETRICS
dc.subjectTRADE
dc.subjectGDP
dc.subjectTHEORY
dc.subjectBILATERAL TRADE
dc.subjectSTATISTICS
dc.subjectEVALUATION
dc.subjectSTATA
dc.subjectTRADE THEORIES
dc.subjectPRECISION
dc.subjectSTANDARD
dc.subjectERROR
dc.subjectWEBSITE
dc.subjectSAMPLE SELECTION
dc.subjectMAXIMUM LIKELIHOOD ESTIMATOR
dc.subjectHOMOSCEDASTICITY
dc.subjectLINEAR PROBABILITY MODEL
dc.subjectRANDOM VARIABLE
dc.subjectLINEAR REGRESSION
dc.subjectECONOMIC STATISTICS
dc.subjectDEVELOPMENT POLICY
dc.titleEstimating the Gravity Model When Zero Trade Flows are Frequent and Economically Determined
dc.typeWorking Paper
dc.typeDocument de travail
dc.typeDocumento de trabajo

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