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

Abstract

Nonlinear estimation of the gravity model with Poisson-type regression methods has become popular for modelling 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 and network autocorrelation, these methods may lead to biased parameter estimates. To overcome this problem, eigenvector spatial filtering (ESF) variants of the Poisson/negative binomial specifications have been proposed in the literature on 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, as well as network 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 64 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.

Modelling interprovincial migration in China from 1995 to 2015 based on an eigenvector spatial filtering negative binomial model

“…ESF has been combined with other regression methods (e.g., stepwise regressions; Chun, Griffith, Lee, & Sinha, ) and models (e.g., the geographically weighted regression ESF model; Griffith, , the zero‐inflated ESF model; Metulini, Patuelli, & Griffith, , and the semiparametric ESF model; Tiefelsdorf & Griffith, ). In addition, researchers have applied ESF gradually in migration studies.…”

Trade and Infrastructure in the Belt and Road Initiative: A Gravity Analysis Based on Revealed Trade Preferences

“…Neglecting MTR in gravity equation is considered a "gold medal mistake" (Baldwin and Taglioni 2006), which can be prevented through various econometric techniques (Yotov et al 2016). Feenstra (2004) proposed the use of countryspecific fixed effects, Baier and Bergstrand (2009) accounted for MTR through a first-order Taylor series approximation, and, more recently, Patuelli et al (2016) and Metulini et al (2018) suggested the use of origin and destination-specific spatial filters.…”

Gravity Models in R

“…In data for international trade flows, these zeros can occur if two countries do not trade with each other, the trade flow between countries is so small that it rounds to zero or the trade flows were not observed. As Metulini, Patuelli, and Griffith (2016) highlight, it is nowadays -especially considering sector disaggregated flows -widely recognized that the level of trade between two entities can in fact be zero. The econometric models behind the gravity equation used should therefore reflect the possibility of zero trade flows (see e.g.…”