Solving for structural gravity in panels: yes we can

Published as DG ECFIN working paper, to be published in International Economics

Structural gravity models for trade stem from agnostic models of bilateral trade flows. Although more theoretically sound, they are much more complex to estimate. This difficulty is due to the multilateral resistance terms which account for the general equilibrium constraints of global trade and must be inferred from the rest of the model.
In the present paper, I show that solving for these terms explicitly is a valid econometric approach for gravity models, including in panel data. I propose iterative solutions in Stata based on three different techniques.
An example of these solutions on real data is presented. The results from this test confirm the necessity to account for the multilateral resistance terms in the estimation and raise some questions on the alternative solution using dummies.


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