Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241876 
Year of Publication: 
2020
Series/Report no.: 
cemmap working paper No. CWP1/20
Publisher: 
Centre for Microdata Methods and Practice (cemmap), London
Abstract: 
We study the incidental parameter problem in "three-way" Poisson Pseudo-Maximum Likelihood "PPML" gravity models recently recommended for identifying the effects of trade policies. Despite the number and variety of fixed effects this model entails, we confirm it is consistent for small T and we show it is in fact the only estimator among a wide range of PML gravity estimators that is generally consistent in this context when T is small. At the same time, asymptotic confidence intervals in fixed-T panels are not correctly centered at the true point estimates, and cluster-robust variance estimates used to construct standard errors are generally biased as well. We characterize each of these biases analytically and show both numerically and empirically that they are salient even for real-data settings with a large number of countries. We also offer practical remedies that can be used to obtain more reliable inferences of the effects of trade policies and other time-varying gravity variables.
Subjects: 
Structural Gravity
Trade Agreements
Asymptotic Bias Correction
JEL: 
C13
C50
F10
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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