Jochmans, Koen and Verardi, Vincenzo (2022) Instrumental-Variable Estimation Of Exponential Regression Models With Two-Way Fixed Effects With An Application To Gravity Equations. Journal of Applied Econometrics, vol.37 (n°6). pp. 1121-1137.

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Identification Number : 10.1002/jae.2932


This paper introduces instrumental-variable estimators for exponential-regression models that feature two-way fixed effects. These techniques allow us to develop a theory-consistent approach to the estimation of cross-sectional gravity equations that can accommodate the endogeneity of policy variables. We apply this approach to a data set in which the policy decision of interest is the engagement in a free trade agreement. We explore ways to exploit the transitivity observed in the formation of trade agreements to construct instrumental variables with considerable predictive ability. Within a bilateral model, the use of these instruments has strong theoretical foundations. We obtain point estimates of the partial effect of a preferential-trade agreement on trade volume that range between 20% and 30% and find no statistical evidence of endogeneity.

Item Type: Article
Language: English
Date: 23 August 2022
Refereed: Yes
Uncontrolled Keywords: bias correction, count data, differencing estimator, endogeneity, fixed effects, gravity equatio, , instrumental variable, transitivity.
JEL Classification: C23 - Models with Panel Data
F14 - Country and Industry Studies of Trade
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 07 Sep 2022 12:13
Last Modified: 18 Oct 2022 08:20
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