Working Paper

Controlling for heterogeneity in gravity models of trade and integration

Abstract: This paper compares various specifications of the gravity model of trade as nested versions of a general specification that uses bilateral country-pair fixed effects to control for heterogeneity. For each specification, we show that the a theoretical restrictions to obtain them from the general model are not supported statistically. Because the gravity model has become the ?workhorse? baseline model for estimating the effects of international integration, this has important empirical implications. In particular, we show that, unless heterogeneity is accounted for correctly, gravity models can greatly overestimate the effects of integration on the volume of trade.

Keywords: International trade;

Status: Published in Federal Reserve Bank of St. Louis Review, January/February 2005, 87(1), pp. 49-64

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2004

Number: 1999-010