Anderson, J.A. and E. van Wincoop (2003) “Gravity with Gravitas: A Solution to the Border Puzzle,” American Economic Review 93(1), pp. 170-192. https://pubs.aeaweb.org/doi/pdfplus/10.1257/000282803321455214
Abstract: Gravity equations have been widely used to infer trade flow effects of various institutional arrangements. We show that estimated gravity equations do not have a theoretical foundation. This implies both that estimation suffers from omitted variables bias and that comparative statics analysis is unfounded. We develop a method that (i) consistently and efficiently estimates a theoretical gravity equation and (ii) correctly calculates the comparative statics of trade frictions. We apply the method to solve the famous McCallum border puzzle. Applying our method, we find that national borders reduce trade between industrialized countries by moderate amounts of 20-50 percent. |
Boehm, C. E., Levchenko, A. A., & Pandalai-Nayar, N. (2020). The long and short (run) of trade elasticities. Cambridge: National Bureau of Economic Research, Inc. doi:https://doi.org/10.3386/w27064
Abstract: We propose a novel approach to estimate the trade elasticity at various horizons. When countries change Most Favored Nation (MFN) tariffs, partners that trade on MFN terms experience plausibly exogenous tariff changes. The differential effects on imports from these countries relative to a control group – countries not subject to the MFN tariff scheme – can be used to identify the trade elasticity. We build a panel dataset combining information on product-level tariffs and trade flows covering 1995-2018, and estimate the trade elasticity at short and long horizons using local projections (Jordà, 2005). Our main findings are that the elasticity of tariff-exclusive trade flows in the year following the exogenous tariff change is about −0.76, and the long-run elasticity ranges from −1.75 to −2.25. Our long-run estimates are smaller than typical in the literature, and it takes 7-10 years to converge to the long run, implying that (i) the welfare gains from trade are high and (ii) there are substantial convexities in the costs of adjusting export participation. |
Anderson, J. E., & Eric, v. W. (2004). Trade costs. Journal of Economic Literature, 42(3), 691-751. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/scholarly-journals/trade-costs/docview/213176643/se-2
Abstract: Despite many difficulties in measuring and inferring the height of trade costs and their decomposition into economically useful components, the outlines of a coherent picture emerge from recent developments in data collection and especially in structural modeling of costs. Trade costs have economically sensible magnitudes and patterns across countries and regions and across goods, suggesting useful hypotheses for deeper understanding. This survey is a progress report. Much useful work remains to be done, so suggestions are made. Trade costs are large when broadly defined to include all costs involved in getting a good from producer to final user. Trade costs also vary widely across countries. Trade costs also vary widely across product lines, by factors of as much as ten or more. The patterns of variation make some economic sense, but it is thought more sense can be extracted. |
McCallum, J. (1995). National Borders Matter: Canada-U.S. Regional Trade Patterns. The American Economic Review, 85(3), 615–623. http://www.jstor.org/stable/2118191
Abstract: Examines the economic significance of national borders. Impact of the Canada-United States border on regional trade patterns; Specification issues and econometric questions relating to heteroscedasticity; Overview of the evolution of trade patterns and tariff protection over the period 1950-1993. |
Frankel, Jeffrey, and David Romer (1999) “Does Trade Cause Growth?” American Economic Review, 89 (3), 379-399. https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.89.3.379
Abstract: Examining the correlation between trade and income cannot identify the direction of causation between the two. Countries' geographic characteristics, however, have important effects on trade, and are plausibly uncorrelated with other determinants of income. This paper therefore constructs measures of the geographic component of countries' trade, and uses those measures to obtain instrumental variables estimates of the effect of trade on income. The results provide no evidence that ordinary least-squares estimates overstate the effects of trade. Further, they suggest that trade has a quantitatively large and robust, though only moderately statistically significant, positive effect on income. |
Head and Mayer (2013),”Gravity Models: Workhorse, Toolkit, Cookbook”, Handbook of International Economics Vol 4 http://www.cepii.fr/pdf_pub/wp/2013/wp2013-27.pdf
Abstract: This chapter focuses on the estimation and interpretation of gravity equations for bilateral trade. This necessarily involves a careful consideration of the theoretical underpinnings since it has become clear that naive approaches to estimation lead to biased and frequently misinterpreted results. There are now several theory-consistent estimation methods and we argue against sole reliance on any one method and instead advocate a toolkit approach. One estimator may be preferred for certain types of data or research questions but more often the methods should be used in concert to establish robustness. In recent years, estimation has become just a first step before a deeper analysis of the implications of the results, notably in terms of welfare. We try to facilitate diffusion of best-practice methods by illustrating their application in a step-by-step cookbook mode of exposition. |
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