The results of these first gravity specifications
are provided in Table 3. The first column includes
the results for the entire model, that is, all
countries in the system (the “unrestricted”
scenario). The model’s “fit” (i.e., how well the
independent or right-hand-side variables explain
variance in the dependent variable, i.e., bilateral
trade flows) is strong, explaining almost twothirds
of bilateral trade flows (R2 = 0.64). All
variables are of the expected sign (that is, they
affect bilateral trade just as we thought they
would), and all are statistically significant except
the binary variable capturing whether or not
countries had common colonizers. It is interesting
to note that: (1) the largest effects are derived for
the existence of a common currency. This supports
the notion that groupings should take account of
macroeconomic and financial links to the real
sector; extreme currency stability obviously has a
very strong effect; and (2) distance is critical,
supporting the literature on “economic
geography”.
The results of these first gravity specificationsare provided in Table 3. The first column includesthe results for the entire model, that is, allcountries in the system (the “unrestricted”scenario). The model’s “fit” (i.e., how well theindependent or right-hand-side variables explainvariance in the dependent variable, i.e., bilateraltrade flows) is strong, explaining almost twothirdsof bilateral trade flows (R2 = 0.64). Allvariables are of the expected sign (that is, theyaffect bilateral trade just as we thought theywould), and all are statistically significant exceptthe binary variable capturing whether or notcountries had common colonizers. It is interestingto note that: (1) the largest effects are derived forthe existence of a common currency. This supportsthe notion that groupings should take account ofmacroeconomic and financial links to the realsector; extreme currency stability obviously has avery strong effect; and (2) distance is critical,supporting the literature on “economicgeography”.
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