Cross-sectional dependence model specifications in a static trade panel data setting

The focus is on cross-sectional dependence in panel trade flow models. We propose alternative
specifications for modeling time invariant factors such as socio-cultural indicator variables,
e.g., common language and currency. These are typically treated as a source of heterogeneity
eliminated using fixed effects transformations, but we find evidence of cross-sectional dependence
after eliminating country-specific and time-specific effects. These findings suggest use of
alternative simultaneous dependence model specifications that accommodate cross-sectional dependence,
which we set forth along with Bayesian estimation methods. Ignoring cross-sectional
dependence implies biased estimates from panel trade flow models that rely on fixed effects.