Bilateral Trade Flows: One Prediction of Several Theories Estimated in Nine Thousand and Two Samples

22 Pages Posted: 24 Jan 1997

See all articles by Wolfgang Keller

Wolfgang Keller

University of Colorado; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Simon J. Evenett

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR)

Date Written: Undated

Abstract

Re-sampling techniques and theoretically-motivated extraneous information are used to revisit Hummels and Levinsohn's (1995) analysis of the testable implication of the monopolistic competition trade theory for bilateral trade volumes. Confronting this implication with data from over nine-thousand samples, we find a robust relationship between the estimated parameter and the summary statistics of the samples. Using this information, which is extraneous to the estimating equation, we rank the samples according to the likely share of monopolistic competition-inspired trade in total trade volumes. We then conduct a consistency check: to examine whether this testable implication is less refuted in samples where the production structures are more conducive to generating large shares of monopolistic competition-inspired trade. The monopolistic competition trade theory passes this consistency check. Next, we recognize that other trade theories can generate the same estimating equation. We argue that the assumptions, unrelated to these models' production structure, are unlikely to account for the differences in the estimated parameter across the samples. Our estimation results imply that the testable implication performed worse in samples where factor-endowment based trade is more likely to predominate. These findings indicate that the empirical performance of the trade volume predictions of the Helpman- Krugman monopolistic competition trade theory is much better than suggested by previous research.

JEL Classification: L11, C81, F49, R38

Suggested Citation

Keller, Wolfgang and Evenett, Simon J., Bilateral Trade Flows: One Prediction of Several Theories Estimated in Nine Thousand and Two Samples (Undated). Available at SSRN: https://ssrn.com/abstract=1686 or http://dx.doi.org/10.2139/ssrn.1686

Wolfgang Keller (Contact Author)

University of Colorado ( email )

Department of Economics
PO Box 256
Boulder, CO 80309
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Simon J. Evenett

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
44 1865 288 875 (Phone)
44 1865 288 805 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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