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

Metulini, Rodolfo ; Patuelli, Roberto ; Griffith, Daniel A. (2016) A Spatial-Filtering Zero-Inflated Approach to the Estimation of the Gravity Model of Trade. Bologna: Dipartimento di Scienze economiche DSE, p. 19. DOI 10.6092/unibo/amsacta/5426. In: Quaderni - Working Paper DSE (1081). ISSN 2282-6483.
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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.

Document type
Monograph (Working Paper)
Metulini, RodolfoUniversity of Brescia0000-0002-9575-5136
Patuelli, RobertoUniversity of Bologna0000-0003-1908-4307
Griffith, Daniel A.University of Texas Dallas
bilateral trade, unconstrained gravity model, eigenvector spatial filtering, zero flows, backward stepwise, zero-inflation
Deposit date
19 Oct 2016 09:46
Last modified
07 Jun 2017 09:09

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