The log of gravity
By: Joao Santos Silva and Silvana Tenreyro.
Contributors: Tenreyro, Silvana.; London School of Economics and Political Science. Centre for Economic Performance.
Series: CEP discussion paper ;; no. 701; Discussion paper (London School of Economics and Political Science. Centre for Economic Performance : Online) ;; no. 701.
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2005
Place of publication: London
Language: eng
Format: Electronic resource
Description: "Although economists have long been aware of Jensen's inequality, many econometric applications have neglected an important implication of it: the standard practice of interpreting the parameters of log-linearized models estimated by ordinary least squares as elasticities can be highly misleading in the presence of heteroskedasticity. This paper explains why this problem arises and proposes an appropriate estimator. Our criticism to conventional practices and the solution we propose extends to a broad range of economic applications where the equation under study is log-linearized. We develop the argument using one particular illustration, the gravity equation for trade, and apply the proposed technique to provide new estimates of this equation. We find significant differences between estimates obtained with the proposed estimator and those obtained with the traditional method. These discrepancies persist even when the gravity equation takes into account multilateral resistance terms or fixed effects."
Notes: Includes bibliographical references.
Title from PDF file (viewed on Sept. 6, 2005).
"July 2005."
Also available in print.
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