The Econometrics of Gravity Models in International Trade

Over the last few decades, multi-indexed data on trade, multinational activity, and even migration have become available. The by far most prominent application of multi-dimensional data in the context of international economics is the estimation of the famous gravity equation of international trade, where bilateral export or import volume (or foreign direct investment stock or migration stock) is the dependent variable of interest. This chapter provides a survey of empirical issues in gravity-model estimation from a panel econometric perspective. It sets out with a generic illustration of the theoretical foundations of gravity equations and proceeds with the modeling of the multidimensional stochastic structure, focusing on fixed-effects estimation.