Gravity Models of Trade: Unobserved Heterogeneity and Endogeneity

Abstract

We consider the estimation of the usual Gravity model of trade, which involves flows of trade, say exports, from country i to country j in time period t. We suggest an easy-to-implement generalised method of moments estimator that avoids the issues associated with the usual fixed effects treatment of the unobserved heterogeneity in this type of models and at the same time provides consistent parameter estimates in the face of potentially endogenous covariates.