Searching for the Appropriate Measure of Multilateral Trade-Resistance Terms in the Gravity Model of Bilateral Trade Flows

Abstract

The aim of the paper is to compare different approximations of multilateral trade-resistance in the gravity model and the influence of their use on estimation results for models of EU-trade. Three synthetic variables: for bilateral trade costs, exporter’s and importer’s remoteness are used as an alternative for including time-varying country effects. Results indicate significant impact of those variables but not wholly compatible with the theory. Estimated coefficients of trade determinants, including Euro’s effects, have expected values in both approaches only if the FE estimator is applied.