Structural Gravity and Fixed Effects
NBER Working Paper No. 21212
The gravity equation for trade flows is one of the most successful empirical models in economics and has long played a central role in the trade literature (Anderson, 2011). Different approaches to estimate the gravity equation, i.e. reduced-form or more structural, have been proposed. This paper examines the role of adding-up constraints as the key difference between structural gravity with "multilateral resistance" indexes and reduced-form gravity with simple fixed effects by exporter and importer. In particular, estimating gravity equations using the Poisson Pseudo-Maximum-Likelihood Estimator (Poisson PML) with fixed effects automatically satisfies these constraints and is consistent with the introduction of "multilateral resistance" indexes as in Anderson and van Wincoop (2003).
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Document Object Identifier (DOI): 10.3386/w21212
Published: Fally, Thibault, 2015. "Structural gravity and fixed effects," Journal of International Economics, Elsevier, vol. 97(1), pages 76-85. citation courtesy of
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