Journal Article10.1162/REST.88.4.641
The Log of Gravity
TL;DR: In this paper, the gravity equation for trade was used to provide new estimates of this equation, and significant differences between the estimated estimator and those obtained with the traditional method were found.
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Abstract: Although economists have long been aware of Jensen's inequality, many econometric applications have neglected an important implication of it: the standard practice of interpreting the parameters of log-linearized models estimated by ordinary least squares as elasticities can be highly misleading in the presence of heteroskedasticity. This paper explains why this problem arises and proposes an appropriate estimator. Our criticism to conventional practices and the solution we propose extends to a broad range of economic applications where the equation under study is log-linearized. We develop the argument using one particular illustration, the gravity equation for trade, and apply the proposed technique to provide new estimates of this equation. We find significant differences between estimates obtained with the proposed estimator and those obtained with the traditional method. These discrepancies persist even when the gravity equation takes into account multilateral resistance terms or fixed effects
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References
A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity
TL;DR: In this article, a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic is presented, which does not depend on a formal model of the structure of the heteroSkewedness.
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A heteroskedasticity-consistent covariance matrix estimator and a direct test
Halbert White
- 01 Jan 2016
TL;DR: In this paper, a covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic is presented, but does not rely on a (possibly incorrect) specific formal model of the structure of the heter-kedasticity.
14.9K
Gravity with Gravitas: A Solution to the Border Puzzle
TL;DR: In this article, a method that consistently and efficiently estimates a theoretical gravity equation and correctly calculates the comparative statics of trade frictions was developed to solve the famous McCallum border puzzle.
•Posted Content
Gravity with Gravitas: A Solution to the Border Puzzle
TL;DR: This article showed that the gravity model usually estimated does not correspond to the theory behind it and showed that national borders reduce trade between the US and Canada by about 44% while reducing trade among other industrialized countries by about 30%.
6.7K