“Gravity for Dummies and Dummies for Gravity Equations”

A new NBER working paper by Richard Baldwin and Daria Taglioni looks like an important extension of the Anderson-van Wincoop approach for trade gravity model fans:

This paper provides a minimalist derivation of the gravity equation and uses it to identify three common errors in the literature, what we call the gold, silver and bronze medal errors. The paper provides estimates of the size of the biases taking the currency union trade effect as an example. We generalize Anderson-Van Wincoop’s multilateral trade resistance factor (which only works with cross section data) to allow for panel data and then show that it can be dealt with using time-varying country dummies with omitted determinants of bilateral trade being dealt with by time-invariant pair dummies.

I’ll get a chance to read the paper next week when I have NBER access, and then I’ll know if “Gravity for Dummies” incorporated the “Log of Gravity.”