This article examines the effects of zero trade on the estimation of the gravity model using both simulated and real data with a panel structure, which is different from the more conventional cross-sectional structure. We begin by showing that the usual log-linear estimation method can result in highly deceptive inference when some observations are zero. As an alternative approach, we suggest using the poisson fixed effects estimator. This approach eliminates the problems of zero trade, controls for heterogeneity across countries, and is shown to perform well in small samples.
Field of Research
159999 Commerce, Management, Tourism and Services not elsewhere classified
Socio Economic Objective
970115 Expanding Knowledge in Commerce, Management, Tourism and Services