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 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.
Original language | English |
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Publication status | Published - 2018 |
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Series | Working Papers in Regional Science |
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Number | 2018/04 |
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- 507026 Economic geography
- 507003 Geoinformatics
- Working Papers in Regional Science