A Spatial-Filtering Zero-Inflated Approach to the Estimation of the Gravity Model of Trade

Quaderni - Working Paper DSE N° 1081

21 Pages Posted: 18 Oct 2016

See all articles by Rodolfo Metulini

Rodolfo Metulini

Scuola Superiore Sant'Anna di Pisa; University of Brescia - Department of Economics and Management; IMT Institute for Advanced Studies

Roberto Patuelli

University of Bologna - Department of Economics

Daniel A. Griffith

University of Texas at Dallas - School of Economic, Political and Policy Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2016

Abstract

Nonlinear estimation of the gravity model with Poisson/negative binomial methods has become popular to model international trade flows, because it permits a better accounting for zero flows and extreme values in the distribution tail. Nevertheless, as trade flows are not independent from each other due to spatial autocorrelation, these methods may lead to biased parameter estimates. To overcome this problem, eigenvector spatial filtering variants of the Poisson/negative binomial specification have been proposed in the literature of gravity modelling of trade. However, no specific treatment has been developed for cases in which many zero flows are present. This paper contributes to the literature in two ways. First, by employing a stepwise selection criterion for spatial filters that is based on robust (sandwich) p-values and does not require likelihood-based indicators. In this respect, we develop an ad hoc backward stepwise function in R. Second, using this function, we select a reduced set of spatial filters that properly accounts for importer-side and exporter-side specific spatial effects, both at the count and the logit processes of zero-inflated methods. Applying this estimation strategy to a cross-section of bilateral trade flows between a set of worldwide countries for the year 2000, we find that our specification outperforms the benchmark models in terms of model fitting, both considering the AIC and in predicting zero (and small) flows.

Keywords: bilateral trade, unconstrained gravity model, eigenvector spatial filtering, zero flows, backward stepwise, zero-inflation

JEL Classification: C14, C21, F10

Suggested Citation

Metulini, Rodolfo and Metulini, Rodolfo and Patuelli, Roberto and Griffith, Daniel A., A Spatial-Filtering Zero-Inflated Approach to the Estimation of the Gravity Model of Trade (October 10, 2016). Quaderni - Working Paper DSE N° 1081, Available at SSRN: https://ssrn.com/abstract=2854075 or http://dx.doi.org/10.2139/ssrn.2854075

Rodolfo Metulini (Contact Author)

Scuola Superiore Sant'Anna di Pisa ( email )

Biblioteca Scuola Superiore Sant'Anna
Piazza Martiri della Liberta, n. 33
Pisa, 56127
Italy

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

Roberto Patuelli

University of Bologna - Department of Economics ( email )

via Anghera' 22
Rimini, 47921
Italy
+39-0541-434276 (Phone)
+39-02-700419665 (Fax)

HOME PAGE: http://https://sites.google.com/site/patuellihomepage/

Daniel A. Griffith

University of Texas at Dallas - School of Economic, Political and Policy Sciences ( email )

P.O. Box 830688, GR 31
Richardson, TX 75083
United States

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