Gravity for Dummies and Dummies for Gravity Equations
This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop's multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.
We thank Thierry Meyer, Volker Nitsch and Rob Feenstra for helpful feedback. This paper reflects views of the authors, which do not necessarily correspond with those of the ECB nor imply the expression of any opinion whatsoever on the part of the ECB. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
"Trade effects of the euro: A comparison of estimators”, with Daria Taglioni, Journal of Economic Integration, 22(4), December, pp 780–818. 2007. Circulated as “Gravity for dummies and dummies for gravity equations” CEPR DP5850, and NBER WP 12516. 2007.