Gravity for Dummies and Dummies for Gravity Equations

This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop's multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.

Gravity chains: estimating bilateral trade flows when parts and components trade is important

Trade is measured on a gross sales basis while GDP is measured on a net sales basis, i.e. value added. The rapid internationalisation of production in the last two decades has meant that gross trade flows are increasingly unrepresentative of value added flows. This fact has important implications for the estimation of the gravity equation. We present empirical evidence that the standard gravity equation performs poorly by some measures when it is applied to bilateral flows where parts and components trade is important. We also provide a simple theoretical foundation for a modified gravity equation that is suited to explaining trade where international supply chains are important. JEL Classification: F01, F10bilateral flows, gravity, parts and components trade, Value chains

Firms in the great global recession: The role of foreign ownership and financial dependence

This paper investigates the channels through which the global crisis of 2008- 2009 spread to economic activity of an emerging, fast growing economy with sound macroeconomic fundamentals. On the basis of Polish firm-level data we find that a number of individual f irm characteristics account for a heterogeneous response. In p articular, foreign ownership appears to have provided a higher degree of resilience to the crisis. Our results indicate that this effect might be due to intra-group lending mechanisms supporting affiliates facing external credit constraints.global crisis, firm-level data, foreign ownership, financial constraints, internal capital market

The Impact of Monetary Union on Trade Prices

Two seemingly unconnected empirical results suggest an intriguing mechanism. First, economic integration helps harmonize prices internationally, with trade being the primary channel (Rogoff 1996, Goldberg and Knetter 1997). Second, monetary union may greatly increase the amount of trade among members (Rose 2001). Putting these together, we see that formation of a monetary union may induce changes that help harmonise inflation rates. The effect might be large if the elimination of exchange rate volatility simultaneously leads to a large increase in intra-union trade and a big increase in the speed at which price shocks are transmitted across members' goods markets. The problem is that standard estimates of price transmission speed suggest that trade's price-homogenising effect operates too slowly to matter much. Some new empirical evidence, however, suggests that a reduction in exchange rate variability reduces the variability of international price differences. Moreover, the effect seems to be highly nonlinear, and monetary union seems to have an effect even controlling for exchange rate volatility. This paper is a first attempt to piece together part of this mechanism, namely the impact of monetary union (and exchange rate volatility more generally) on the international transmission of price shocks via the imported/exported inflation channel. In doing this we generate specific testable hypotheses and confront these with a number of data sets on European trade prices.price arbitrage, exchange rate volatility, monetary union, market segmentation, non-linearities, no-arbitrage bands, harmonisation of price movements

Trade effects of the euro: evidence from sectoral data

This paper contributes to the literature on the impact of EMU on trade, adding two new elements. First, we propose a theoretical model for explaining how the euro could have increased trade by the large amounts found in the empirical literature. Second, we propose a sectoral dataset to test the insights from the theory. Our theoretical model shows that in a monopolistic competition set-up, the effect of exchange rate uncertainty on trade has nonlinear features, suggesting that EMU and a standard measure for exchange rate uncertainty should be jointly significant. Our empirical results confirm this finding, with a trade creating effect between 108 and 140% in a pooled regression, and between 54 to 88% when sectors are estimated individually. Importantly, we find evidence for a trade creating effect also for trade with third countries. JEL Classification: F12, C33, E0Exchange rate volatility, gravity, monetary union, Rose effect, sectoral trade

The impact of monetary union on trade prices

Two seemingly unconnected empirical results suggest an intriguing mechanism. First, economic integration helps harmonize prices internationally, with trade being the primary channel (Rogoff 1996, Goldberg and Knetter 1997). Second, monetary union may greatly increase the amount of trade among members (Rose 2001). Putting these together, we see that formation of a monetary union may induce changes that help harmonise inflation rates. The effect might be large if the elimination of exchange rate volatility simultaneously leads to a large increase in intra-union trade and a big increase in the speed at which price shocks are transmitted across members' goods markets. This paper investigates part of this mechanism and finds that monetary union may indeed result in faster cross-border transmission of price movements via the import and export price channel which, in turn, would tend to homogenise price movements across the member countries of a monetary union. JEL Classification: D40, F15, F31Exchange rate volatility, harmonisation of price movements, market segmentation, monetary union, no-arbitrage bands

Gravity Chains: Estimating Bilateral Trade Flows When Parts And Components Trade Is Important

Trade is measured on a gross sales basis while GDP is measured on a net sales basis, i.e. value added. The rapid internationalisation of production in the last two decades has meant that gross trade flows are increasingly unrepresentative of the value added flows. This fact has important implications for the estimation of the gravity equation. We present empirical evidence that the standard gravity equation performs poorly by some measures when it is applied to bilateral flows where parts and components trade is important. We also provide a simple theoretical foundation for a modified gravity equation that is suited to explaining trade where international supply chains are important.