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.Series: Working Papers in Regional Scienc

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 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.Series: Working Papers in Regional Scienc

Network dependence in multi-indexed data on international trade flows

Faced with the problem that conventional multidimensional fixed effects models only focus on unobserved heterogeneity, but ignore any potential cross-sectional dependence due to network interactions, we introduce a model of trade flows between countries over time that allows for network dependence in flows, based on sociocultural connectivity structures. We show that conventional multidimensional fixed effects model specifications exhibit cross-sectional dependence between countries that should be modeled to avoid simultaneity bias. Given that the source of network interaction is unknown, we propose a panel gravity model that examines multiplenetwork interaction structures, using Bayesian model probabilities to determine those most consistent with the sample data. This is accomplished with the use of computationally efficient Markov Chain Monte Carlo estimation methods that produce a Monte Carlo integration estimate of the log-marginal likelihood that can be used for model comparison. Application of the model to a panel of trade flows points to network spillover effects, suggesting the presence of network dependence and biased estimates from conventional trade flow specifications. The most important sources of network dependence were found to be membership in trade organizations, historical colonial ties, common currency, and spatial proximity of countries.Series: Working Papers in Regional Scienc

Conventional versus network dependence panel data gravity model specifications

Past focus in the panel gravity literature has been on multidimensional fixed effects specifications in an effort to accommodate heterogeneity. After introducing conventional multidimensional fixed effects, we find evidence of cross-sectional dependence in flows. We propose a simultaneous dependence gravity model that allows for network dependence in flows, along with computationally efficient Markov Chain Monte Carlo estimation methods that produce a Monte Carlo integration estimate of log-marginal likelihood useful for model comparison. Application of the model to a panel of trade flows points to network spillover effects, suggesting the presence of network dependence and biased estimates from conventional trade flow specifications. The most important sources of network dependence were found to be membership in trade organizations, historical colonial ties, common currency and spatial proximity of countries.Series: Working Papers in Regional Scienc

MCMC estimation of panel gravity models in the presence of network dependence

Past focus in the panel gravity literature has been on multidimensional fixed effects specifications in an effort to accommodate heterogeneity. After introducing fixed effects for each origin- destination dyad and time-period speciffic effects, we find evidence of cross-sectional dependence in flows. We propose a simultaneous dependence gravity model that allows for network dependence in flows, along with computationally efficient MCMC estimation methods that produce a Monte Carlo integration estimate of log-marginal likelihood useful for model comparison. Application of the model to a panel of trade flows points to network spillover effects, suggesting the presence of network dependence and biased estimates from conventional trade flow specifications.Series: Working Papers in Regional Scienc

International R&D Spillovers and other Unobserved Common Spillovers and Shocks

Studies which are based on Coe and Helpman (1995) and use weighted foreign R&D variables to estimate channel-specific R&D spillovers disregard the interaction between international R&D spillovers and other unobserved common spillovers and shocks. Using a panel of 50 economies from 1970-2011, we find that disregarding this interaction leads to inconsistent estimates whenever knowledge spillovers and other unobserved effects are correlated with foreign and domestic R&D. When this interaction is modeled, estimates are consistent; however, they confound foreign and domestic R&D effects with unobserved effects. Thus, the coefficient of a weighted foreign R&D variable cannot capture genuine channel-specific R&D spillovers.Comment: 28 page

Factor demand linkages, technology shocks, and the business cycle

This paper argues that factor demand linkages can be important for the transmission of both sectoral and aggregate shocks. We show this using a panel of highly disaggregated manufacturing sectors together with sectoral structural VARs. When sectoral interactions are explicitly accounted for, a contemporaneous technology shock to all manufacturing sectors implies a positive response in both output and hours at the aggregate level. Otherwise there is a negative correlation, as in much of the existing literature. Furthermore, we find that technology shocks are important drivers of the business cycle

Vertical intra-industry trade and the EU accession: The case of Hungarian agri-food sector

The aim of this paper is to examine the relationship between the factor endowment and the pattern of intra-industry trade. Our empirical analysis relates to Hungary’s intra-industry trade in agri-food products with 26 member states of the EU over the period 1999-2010. Estimations reject the comparative advantage explanation of vertical intra-industry trade and provide partial support the prediction of Flam and Helpman model. Findings highlight that nature of factor endowments play also important role in explanation of vertical intra-industry trade. Other variables like market size and distance confirm the theoretical expectations. In addition, trade with new member states positively, whilst the EU accession ambigouosly influence the share of vertical IIT

Heterogeneous mark-ups, growth and endogenous misallocation

The recent work on misallocation argues that aggregate productivity in poor countries is low because various market frictions prevent marginal products from being equalized. By focusing on such allocative inefficiencies, misallocation is construed as a purely static phenomenon. This paper argues that misallocation also has dynamic consequences because it interacts with firms’ innovation and entry decisions, which determine the economy’s growth rate. To study this link between misallocation and growth, I construct a tractable endogenous growth model with heterogeneous firms, where misallocation stems from imperfectly competitive output markets. The model has an analytical solution and hence makes precise predictions about the relationship between growth, misallocation and welfare. It stresses the importance of entry. An increase in entry reduces misallocation by fostering competition. If entry also increases the economy-wide growth rate, static misallocation and growth are negatively correlated. The welfare consequences of misallocation might therefore be much larger once these dynamic considerations are taken into account. Using firm-level panel data from Indonesia, I present reduced form evidence for the importance of imperfect output market and calibrate the structural parameters. A policy, which reduces existing entry barriers, increases growth and reduces misallocation. The dynamic growth effects are more than four times as large as their static counterpart

UKERC Review of evidence for the rebound effect: Technical report 2: Econometric studies

This Working Paper examines the evidence for direct rebound effects that is available from studies that use econometric techniques to analyse secondary data. The focus throughout is on consumer energy services, since this is where the bulk of the evidence lies