Structural Gravity and Fixed Effects
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).
I would like to thank Jim Anderson, Justin Caron, Keith Head, Russell Hillberry, Xiaodong Liu, Jim Markusen, Keith Maskus, Thierry Mayer, João Santos Silva, Silvana Tenreyro, Daniel Trefler, Yoto Yotov and participants to the AEA meetings for helpful comments and discussions. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.