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‘DUAL’ GRAVITY: USING SPATIAL ECONOMETRICS TO CONTROL FOR MULTILATERAL RESISTANCE
Author(s) -
Behrens Kristian,
Ertur Cem,
Koch Wilfried
Publication year - 2012
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.1231
Subject(s) - gravity equation , spatial econometrics , econometrics , gravity model of trade , economics , dual (grammatical number) , border effect , bilateral trade , international trade , geography , art , literature , archaeology , china
SUMMARY We derive a quantity‐based structural gravity equation system in which both trade flows and error terms are cross‐sectionally correlated. This system can be estimated using techniques borrowed from the spatial econometrics literature. To illustrate our methodology, we apply it to a well‐known Canada–US trade dataset. We find that border effects between the USA and Canada are smaller than suggested by previous studies: about 7.5 for Canadian provinces and about 1.3 for US states. Hence controlling directly for cross‐sectional interdependence among both trade flows and error terms reduces measured border effects by capturing ‘multilateral resistance’. Copyright © 2010 John Wiley & Sons, Ltd.