DETERMINANTS OF INTRA-INDUSTRY TRADE: AN INVESTIGATION WITH BMA FOR THE EUROPEAN UNION

Krzysztof Beck

doi:10.12955/cbup.v6.1131

Abstract

The empirical literature on the determinants of intra-industry trade (IIT) is vast and comprehensive, yet as authors failed to properly account for model uncertainty it has brought inconsistent and conflicting results. To resolve this issue, Bayesian model averaging was applied to investigate the robustness of 48 potential determinants of bilateral IIT for the panel of 26 European Union countries over the 1999-2011 period. Application of BMA demonstrated that 11 of them are robust determinants of IIT, namely real GDP products, trade openness, membership in the European Union and the Euro area, corruption, and differences in factor abundance. Among the factors of production, the key role in the determination of IIT patterns can be assigned to the differences in human capital. Yet, transportation cost and cultural similarity have no impact on the IIT patterns.

Highlights

Intra-industry trade (IIT) is at the heart of European integration
This paper presents the results of the sensitivity analysis of the determinants of intra-industry trade (IIT) with Bayesian model averaging (BMA)
OPEN is characterized by a positive posterior mean, which indicates that more open countries are generally more involved in IIT

Summary

Introduction

Intra-industry trade (IIT) is at the heart of European integration. A high degree of IIT promotes more symmetrical distribution of economic shocks and, in turn, tighter business cycle synchronization. Application of BMA demonstrated that 11 of them are robust determinants of IIT, namely real GDP product, trade openness, membership in the European Union and the Euro area, corruption, and differences in factor abundance. 3. Estimation Strategy To find a set of robust determinants of intra-industry trade, Bayesian model averaging (BMA) under different prior specification was applied.

Results

Conclusion