Cross-Sectional Dependence Model Specifications in a Static Trade Panel Data Setting
44 Pages Posted: 28 Feb 2018
Date Written: December 4, 2017
Abstract
The focus is on cross-sectional dependence in panel trade flow models. We propose alternative specifications for modeling time invariant factors such as socio-cultural indicator variables, e.g., common language and currency. These are typically treated as a source of heterogeneity eliminated using fixed effects transformations, but we find evidence of cross-sectional dependence after eliminating country-specific effects. These findings suggest use of alternative simultaneous dependence model specifications that accommodate cross-sectional dependence, which we set forth along with Bayesian estimation methods. Ignoring cross-sectional dependence implies biased estimates from panel trade flow models that rely on fixed effects.
Keywords: Bayesian, MCMC estimation, socio-cultural distance
JEL Classification: C18, C51, R11
Suggested Citation: Suggested Citation