‘DUAL’ GRAVITY: USING SPATIAL ECONOMETRICS TO CONTROL FOR MULTILATERAL RESISTANCE

Authors

  • Kristian Behrens,

    1. Département des Sciences Economiques, Université du Québec à Montréal (UQAM), Canada
    2. CIRPÉE ESG-UQAM, Montréal, Canada
    3. CEPR, London, UK
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  • Cem Ertur,

    1. LEO, Faculté de Droit d'Economie et de Gestion, Université d'Orléans, France
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  • Wilfried Koch

    Corresponding author
    1. Département des Sciences Economiques, Université du Québec à Montréal (UQAM), Canada
    2. CIRPÉE ESG-UQAM, Montréal, Canada
    • Département des Sciences Economiques, Université du Québec à Montréal, Case postale 8888, Succursale Centre-Ville Montréal, Québec H3C 3P8, Canada.
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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.

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