Specification and Estimation of Gravity Models: A Review of the Issues in the Literature

Abstract

The gravity model has become an efficient tool in the analysis of international economic relations due to its theoretical derivation and ability to explain these relationships. The contending issue now is the appropriate specification and estimation techniques. This paper presents a review of current controversy surrounding the specification and estimation of gravity model with zero trade data, which we called ‘gravity modeling estimation debate’. Different positions in the literature were enunciated with the view of bringing the readers to the frontier of knowledge in this area of empirical strategies revolving on the gravity modeling in the presence of zero trade. By and large, the identification of the most appropriate estimation technique in the presence of zero trade is still an empirical issue. This paper deduced that the choice of the estimation technique should largely be based on the research questions, the model specification and the choice of data to be used for the analysis.