A1335
Title: Nonparametric time-varying gravity models with three-way fixed effects
Authors: Juan Manuel Rodriguez-Poo - Universidad de Cantabria (Spain) [presenting]
Daniel Henderson - University of Alabama (United States)
Alexandra Soberon - Universidad de Cantabria (Spain)
Stefan Sperlich - University of Geneva (Switzerland)
Abstract: Gravity models with exporter-time, importer-time, and pair fixed effects are the standard framework for estimating the causal effects of bilateral trade policies such as tariffs, free trade agreements, and exchange rate frictions. In long panels, two key challenges arise: policy elasticities may change over time, and the many fixed effects create an incidental-parameters problem that complicates estimation and inference. A nonparametric, time-varying-coefficient gravity model estimated in levels -avoiding log-linearization and accommodating zeros in trade flows- is proposed together with a concentrated local-moment estimator that removes pair fixed effects while exploiting temporal smoothness in the coefficients. Under a fixed cross-sectional dimension and growing time dimension, the estimator is asymptotically normal, and practical bootstrap inference with an optional bias correction is available. Simulations calibrated to empirical applications confirm the estimator performs well and inference is reliable when bilateral covariates display sufficient time variation. Three applications illustrate the method: Latin American trade liberalization, foreign direct investment and exchange-rate volatility, and U.S. interstate migration responses to income-tax differentials. In each case, the method uncovers economically meaningful dynamics that parametric trend interactions miss and provides a diagnostic for when data lack sufficient time variation for flexible estimation.
