Poisson Pseudo-maximum Likelihood Estimator Research Articles

Policy analysis with Melitz-type gravity model: Evidence from Kyrgyzstan

Several governments worldwide aim at fostering agricultural productivity growth by providing investment support. However, the policy’s effect on trade for middle- and low-income countries has not been analyzed so far. This paper analyzes the impact of agricultural policies (credit subsidies and tariffs) on agricultural trade flows by modifying a Melitz-type structural gravity model for a small and open economy. According to the theory, trade flows are expected to increase with credit subsidies and decrease with partners’ applied tariff rates. We analyze bilateral agricultural trade flows between Kyrgyzstan and its 69 trading partners from 2007 to 2018 to test our theoretical findings. Applying the Poisson pseudo maximum likelihood estimator, we find that credit subsidies effectively increase international trade flows while applied tariffs imposed on agricultural products reduce Kyrgyzstan’s export substantially. These results can be applied to similar economies with publicly available data where small budgetary efforts drive trade expansion.

Effects of Trade Facilitation on Trade Costs in Developed and Developing Countries: PPML Analysis

Trade facilitation reduces trade costs and eases the movement of goods and services. Studies have shown that trade flows increased by improving the trade facilitation process and reducing trade costs. The study aims to estimate the effects of trade facilitation enhancement on trade costs in 111 developed and developing countries over the 2008 to 2014 period using the Poisson-Pseudo Maximum Likelihood (PPML) estimator. The findings show that trade facilitation components such as border administration, business environment and transport and communication infrastructure reduce trade costs. This trade facilitation should have helped alleviate the effects of the financial recession and eased world trade recovery. On the other hand, the study finds that additional market access increases trade costs. The most important finding is that the effectiveness of trade facilitation is higher when more countries engage in trade and when those countries are together participating in trade facilitation.

Trade Liberalization and Comparative Advantage: Evidence from Indonesia and Asian Trade Partners

This study analyzes whether ongoing liberalization has resulted in more profound trade expansion for Indonesia versus regional partner countries. A gravity model is first employed to find whether regional trade agreements resulted in more significant intra-regional exports or diverted trade. This study applies the generalized method of moment (GMM-sys) and the Poisson pseudo-maximum likelihood (PPML) estimator. Four groups of manufactured products are aggregated according to technology intensity, and two nature-based groups of products are estimated in the dynamic panel model. Additionally, revealed comparative advantage (RCA) and a trade balance index (TBI) for 5120 products are used to map goods based on specialization–advantage patterns. The gravity model indicates that regional trade agreements supported trade in manufactured and naturally sourced goods but not in high-tech and primary goods. Additionally, export expansion took place in goods that revealed comparative advantage and export specialization. Competition has increased between Indonesia and four regional trade partners: China, India, Thailand, and Vietnam. Indonesia gained from trading primary materials while losing in some low-cost manufacturing sectors. The potential for trade expansion remains large, as trade patterns differ among regional partners.

Philippines - ASEAN Trade Potential: An Application of Intra-ASEAN Augmented Gravity Model

ASEAN has made great progress toward economic unification and free trade in the area. With the objectives of creating a unified market, expanding intra-ASEAN trade and investment, and attracting foreign investment, ASEAN has been a cornerstone of the Philippines' diplomatic and commercial policies, which is evident in the Philippine policy of creating a more prosperous, secure, and free Southeast Asia through a variety of measures in politics, economics, international trade, and functional cooperation. The researchers revisit Jan Tinbergen’s Gravity Theory by using the adjusted augmented gravity model in a panel data of bilateral trade flows between the Philippines and the ASEAN member countries from 1995 to 2019 at the national level using the Poisson-Pseudo Maximum Likelihood estimator and Ordinary Least Squares, both with fixed effects, in a model-comparison approach. Using the fitted trade values from the PPML estimates and the standardized real values of exports and imports of the trading countries through the index of Average Standardized Trade Potential, it was found that the bilateral trade between the Philippines and other ASEAN member countries has been efficiently performing over the past decades, except for Brunei Darussalam, Cambodia, Lao PDR, and Myanmar. Hence, a dynamic and more inclusive approach should be adopted by both the Philippines and its trading partners to reach the optimum bilateral trade potential in the nearest future.

Asylum Flows in the EU Context: Lessons from Gravity

The present paper aims to identify the impact of geographical, institutional, and sociopolitical factors as regards the magnitude and the direction of asylum seekers in the European Union between 2000 and 2018. The approach is based on the application of gravity model using Ordinary Least Squares (OLS) and Poisson Pseudo-Maximum Likelihood (PPML) estimators. The analysis incorporates a set of institutional variables, in order to assess the impact of the gradual EU enlargement process as well as the differentiated policies on granting asylum among the EU members. The strong presence of refugees in destination countries can be interpreted as an indication of various favorable conditions for granting asylum to persons of the same nationality. The results suggest that the role of migration networks tends to substitute the lack of an integrated EU immigration policy. Finally, either in geographical or institutional terms, E.U. appears as a non-homogeneous space for asylum seekers.

한국-ASEAN FTA의 산업별 무역효과에 관한 부분균형 구조적 중력모형분석

This study tried to estimate the ex-post industrial trade effects of the Korea-ASEAN FTA with the structural gravity equation. In order to effectively achieve this purpose, I used exporter-sector-time and importer-sector-time fixed effects to account for the unobservable multilateral resistance terms, employed the Poisson Pseudo Maximum Likelihood(PPML) estimator to address the issue of heteroskedasticity in trade data and to take advantage of the information contained in the zero trade flows, and used ITPD-E database on international and intra-national trade flows for consistency with the underlying gravity theory. As a result of the PPML estimation, it was found that the effects of the basic gravitational factors (distance, common language, colonial relationship, border, etc.) widely adopted are heterogeneous by industry, and the Korea-ASEAN FTA’s sectoral trade effects were the highest in the manufacturing sector.

Reverse FDI and knowledge-and-physical-capital model: empirical evidence from emerging economies

PurposeThe main aim of this paper is to verify whether the modern mainstream economic theory of multinational enterprise that explains foreign direct investment (FDI) from developed countries is also able to account for investment decisions of multinational enterprises (MNEs) from emerging economies.Design/methodology/approachUsing Knowledge-And-Physical-Capital (KAPC) model as an analytical framework and Poisson-pseudo maximum likelihood estimation technique, the authors identify determinants of FDI flows from emerging economies. The data set consists of 38 home and 134 host countries during the period 2000–2012. Empirical evidence supports high explanatory power of KAPC model. Further, compared with the earlier Knowledge-Capital (KC) model, results confirm the importance of physical capital.FindingsThe estimation results confirm the hypothesis that mainstream economic theory can explain FDI flows from the emerging economies by highlighting the roles of total market size, skilled-labor abundance, investment and trade costs and geographical distance between two countries.Research limitations/implicationsThis study casts doubt on the alternative way that the KAPC model suggests to distinguish between horizontal and vertical FDI. The argument that horizontal MNE headquarters would be relatively more abundant than vertical MNE headquarters in countries that are abundant in physical capital relative to skilled labor seems reasonable but the idea of variable specification in the estimated equation should be revised.Practical implicationsFirms should be allowed to move their resources freely into and out of specific activities, both internally and internationally across border. To reach that goal, governments of potential host countries can adopt several measures, most importantly remove restrictions on payments, transfers and capital transactions and open previously closed industries to welcome foreign investment. In addition, to improve investment climate in general, governments need to pay attention to enhancing security of property rights, regulating internal taxation (i.e. corporate income tax), guaranteeing adequacy of infrastructure, efficient functioning of finance and labor markets and fighting against corruption.Social implicationsThe location choice of emerging investors set priority on similarity in economic size, geographical and cultural proximity. It is because shared borders or common official languages would reduce information costs and enhance information flows. Also, investors consider horizontal FDI (with motivation to expand market demand) as one of main modes of entry into a foreign market and a substitute for export. Likewise, distance is often understood as an important investment friction.Originality/valueThe outstanding contribution is that the research has uncovered the positive and statistically significant effect of physical capital on FDI activity, which has not been discussed in the earlier KC model. However, at the same time, the study casts doubt on the KAPC model's argument that relative abundance in physical capital to skilled labor between two countries determines FDI types and suggests that this argument and its empirical model specification should be carefully reviewed.

The impact of free trade agreements on Middle East and North Africa exports of intermediate and final goods

AbstractThis paper is the first to analyse the impact of free trade agreements (FTAs) and the harmonisation of rules of origin (RoO) on Middle East and North African (MENA) countries’ exports differentiating between final and intermediate goods for a global sample of trade partners. Data on exports from four MENA countries (Egypt, Jordan, Morocco and Tunisia) to 61 destinations over the period 1995–2016 are used to estimate a structural gravity model applying a Poisson Pseudo Maximum Likelihood (PPML) estimator. Moreover, the paper estimates the effect of the progressive adoption of the Pan‐European‐Mediterranean RoO. Results show that FTAs have been overall successful in increasing MENA exports. This is particularly true for FTAs that eliminate protection on agricultural products. In contrast to the existing literature, we find that the agreements concluded with European countries raise MENA exports, whereas no significant impact is found for the application of the Pan‐European RoO.

Impacts of Environmental Agreements on Bilateral Trade of Climate Industry

We investigated the effect of agreements related to climate change on bilateral trade, using the Poisson pseudo-maximum likelihood (PPML) estimator on a large dataset that requires computing high-dimensional fixed effects. This study develops the concordance between commodities based on harmonized systems (HS) and technologies defined by both international and cooperative patent classifications (IPC/CPC). Using the OECD ENV-TECH classification, covering 169 exporting countries and 179 importing countries worldwide from 1991 to 2019, we determined the relationship between HS commodities and IPC/CPC climate change technologies. The main findings show that, first, the Kyoto Protocol has increased international bilateral trade in the climate change industry, while the Montreal Protocol has led to the opposite effect. In addition, the impact of environmental stringency on international bilateral trade in climate-related industries was negative and significant, refuting the Porter Hypothesis. This result was consistent within the trade between the convention countries. Therefore, national and industrial perspectives are relative, and voluntary climate mitigation methods should be applied, considering the areas where carbon reduction is relatively difficult. In other words, the conventions and policies must shift to a global paradigm in environmental protection and a more inclusive approach, with recognition of diversity in governance types.

India–European Union Trade Integration: An Analysis of Current and Future Trajectories

In a dynamic global environment of increased economic interdependence, nations are more than ever seeking to remove barriers to trade, despite growing trends of protectionism. In this context, India and the EU-27 have initiated talks for the establishment of a Bilateral Trade and Investment Agreement (BTIA) in an attempt to bring their economies together. However, after 16 rounds of negotiations, the failure to conclude this agreement has raised questions regarding the benefits of the agreement to India. This study attempts to examine the current trade scenario and the effects of the proposed regional trade agreement by estimating a structural gravity model. This study employs the Poisson Pseudo Maximum Likelihood (PPML) estimator for analysing the trade-creation and trade-diversion effects of the BTIA to overcome the shortcomings of ordinary least square (OLS) estimators. For the empirical analysis, the merchandise export data from the Gravity database has been taken for a period of 19 years from 2001 to 2019. The results indicate that the BTIA could lead to trade creation and trade diversion, highlighting the need for a re-evaluation of India’s trade policy. JEL Classification: F10, F13, F14, F15, O24

Intellectual property rights and trade: The exceptional case of GMOs

AbstractThis paper examines how foreign intellectual property rights (IPRs) affect US bilateral exports of genetically modified crops (GMOs). We apply the structural gravity model to examine GMO trade between the United States and the countries that comprise the rest of the world. Our econometric method includes the Poisson Pseudo Maximum Likelihood estimator. We use panel data including measures of countries’ IPR regimes, plant patentability, plant variety rights, GMO regulations and asynchronous approvals of GMOs. Results show the United States tends to export fewer GMO crops to countries with strong IPR regimes, plant patentability and plant variety rights. These results are consistent with the market power effect, where the United States restricts exports to countries with strong protections to extract monopoly prices. Second, enforcement of IPRs strengthens the market power effect. Third, the market power effect is strong alongside with GMO regulations and asynchronous approvals. Fourth, the market power effect is larger for self‐pollinating crops vs. hybrids. These findings are robust across a variety of specifications. However, we also find a price premium in countries with less ease of US market access, with more domestic production of GMOs, and with weak traceability requirements. These features play a stronger role than IPRs in determining price.

Aid Effectiveness of Aid for Trade: An Empirical Analysis on the Extensive and Intensive Margins of Aid Recipients

Paris Declaration on Aid Effectiveness held in 2005 emphasized the role of Aid for Trade (AFT) on capacity building of developing nations. Past literature showed mixed results regarding the aid effectiveness of foreign aid both theoretically and empirically. To test the impact of foreign aid thoroughly, we first focus on the AFT which purposes are not only stimulating the volume of trade flow but also facilitating the construction of robust infrastructure and environment for developing nations to participate in the global economy independently. Second, we disaggregate bilateral trade into the extensive and intensive margin of international trade to examine whether AFT affects more on the new products traded or incumbent good. Lastly, we conduct Poisson pseudo maximum likelihood (PPML) estimation to control for zero-value observations and possible heteroskedasticity stemming from the sample. With different sample groups, the results indicate that AFT overall benefits the exports of aid recipients. Particularly, AFT from European Union (EU) shows the most considerable and consistent effect on both the new export and incumbent relationships. Furthermore, AFT from the EU facilitates the new export relationship between developing nations with other developing nations, specifically with those without a Free Trade Agreement (FTA) relationship, indicating that the aid from the EU is relatively effective in establishing new trade partners.

The Impact of Trade Cost on Readymade Garment Export: The Case of Bangladesh

The main purpose of this study is to understand whether the trade cost influences the export of Readymade Garment (RMG) export of Bangladesh. Theoretically, with an increase in the volume of exported goods, the costs will also increase. Therefore, this study is to examine the impact of trade costs on the readymade garment export performance of Bangladesh for the period of 2007 -2015. This study applied two types of panel data models: pooled OLS model and the Poisson-Pseudo Maximum Likelihood (PPML) estimation procedure have been employed in the estimation. The main contribution of the paper compared to other studies on Bangladesh lies in its approach in addressing the impact of trade costs on exports and using PPML gravity equation estimation. The results of the study indicate that trade costs have a significant negative impact on exports of Bangladesh. The major findings show that trade cost has a negative and significant impact on Bangladesh's bilateral RMG export performance. This implies that the Bangladeshi government should work to reduce domestic trade costs in order to boost efficiency and sustainably promote RMG export.

Australia’s Free Trade Agreements (FTAs) and Potentiality of Wheat Exports: A Panel Gravity Model Approach

This paper estimates the trade creation and export diversion effects of different Australia’s free trade agreements (FTAs) using the panel data from 1996 to 2017. The heteroscedasticity robust Regression Error Specification Test confirms the relevance of Poisson Pseudo Maximum Likelihood estimator over Ordinary Least Square estimator. Results showed that the total trade creation effects of FTAs in wheat trade is higher than Intra block export diversion. The exhausted wheat exports potentiality from Australia to the countries like Indonesia, Iraq, Japan, Korea, and the Philippines has suggested seeking for additional potential markets based on demand in the future.

Global agricultural trade impact of the 2011 triple disaster in Japan: A gravity approach*

We examine the evolution of global agricultural trade flows in the light of the 2011 earthquake, tsunami and nuclear accident in Fukushima, Japan. After the 2011 disasters, safety concerns led to the implementation of international surveillance measures on agricultural products from Japan. The physical damages, the domestic and foreign restrictions to production and trade, combined with actual and perceived health risks, affected consumer behaviour and reshaped production, consumption and trade. The existing literature has thoroughly examined individual sectoral effects, mainly through stylised facts and mainly for Japan; however, there is no analysis to date on the effects of the triple disaster on global trade flows of agriculture. With Japan holding 4.1 per cent of global exports of agricultural products and 0.4 per cent of global imports, transmission of the effects to global markets could lead to disruptions in global supply chains, worldwide distribution and trade. We use a gravity approach, together with 2000–2018 panel data and a Poisson Pseudo Maximum Likelihood (PPML) estimator to discuss the impact of the disasters on global trade flows of agriculture. Results for Japan indicate a negative effect on both exports and imports extending until 2014. Counterfactual analysis results suggest transmission of the negative effects to global exports of agricultural products.

Economic Policy Uncertainty, Bilateral Investment Treaties, and Chinese Outward Foreign Direct Investment

This paper examines the effect of bilateral investment treaties (BITs) in promoting Chinese outward foreign direct investment (COFDI) in the presence of rising economic policy uncertainty in China's partner countries. We postulate that the signing of BITs should help stimulate COFDI because the treaties send a credible signal to foreign investors about the host country's intent to protect Chinese investment, and make it more difficult for the host country to violate its treaty obligations. BITs that contain rigorous investment protection and liberalization provisions, in particular, should be more likely to encourage COFDI as they directly influence Chinese investors' expectations about the stability, predictability, and security of the host market. However, while BITs generally promote COFDI, host country economic policy uncertainty may also limit their effectiveness. This is because uncertainty tends to undermine investor confidence, trigger capital flows from high- to low-risk countries, and dampen commercial activities. Poisson pseudo-maximum likelihood (PPML) estimation models of the determinants of COFDI to 188 countries between 2003 and 2017 lend substantial support to our conjectures.

Bias and consistency in three-way gravity models

We study the incidental parameter problem for the “three-way” Poisson Pseudo-Maximum Likelihood (“PPML”) estimator recently recommended for identifying the effects of trade policies and in other panel data gravity settings. Despite the number and variety of fixed effects involved, we confirm PPML is consistent for fixed T and we show it is in fact the only estimator among a wide range of PML gravity estimators that is generally consistent in this context when T is fixed. At the same time, asymptotic confidence intervals in fixed-T panels are not correctly centered at the true parameter values, and cluster-robust variance estimates used to construct standard errors are generally biased as well. We characterize each of these biases analytically and show both numerically and empirically that they are salient even for real-data settings with a large number of countries. We also offer practical remedies that can be used to obtain more reliable inferences of the effects of trade policies and other time-varying gravity variables, which we make available via an accompanying Stata package called ppml_fe_bias.

ICT Augmented Gravity Model Application: Sector Level Analysis of the Asia-Pacific Region

The use of information and communication technologies (ICT) in commerce improves the commercial structure and economic capacity of a country. This study empirically assesses the impact of ICTs on international trade in 36 countries in Asia and the Pacific, at the sectoral level, between 2007 and 2018. The study evaluates whether ICTs improve international trade by hiring the gravity model of international trade and increasing it with the ICT variable. An ICT development indicator (IDI) is formed by joining seven different ICT variables that show ICT infrastructure, use, and skills. Using the Poisson pseudo-maximum likelihood (PPML) estimation technique, this study shows that ICTs improve trade by reducing transaction costs. The findings reveal that information and communication technology positively and significantly influence international trade in all sectors of the Asia-Pacific region, and that trade intensifies when both trading partners have a high endowment of information and communications technology. The study recommends that governments in developing countries upgrade their ICT infrastructure levels.

Tourism and Trade Nexus in Africa: A Gravity Model Approach

The tourism industry is now an important economic sector in Africa. However, as with trade, Africa’s global share of the tourism industry is quite small, which could be attributed to a similarly low level of both intra-regional trade and tourism. Prevailing data and studies suggest that there is a relationship between tourism and trade. The aim of this study, therefore, is to examine the empirical link between tourism and exports in Africa for the period 2006 to 2015. We estimate a structural gravity model using the Poisson pseudo maximum likelihood (PPML) estimator that allows for bilateral zero trade values between trading partners, controls for heteroskedasticity and addresses the potential endogeneity. We find that a 10 percent increase in intra-African tourism boosts the continental exports by between 1.4 and 3.2 percent. These results strongly posit that boosting regional tourism could be instrumental in catalysing intra-African trade, especially within the context of the African Continental Free Trade Area (AfCFTA).

Effect of Quality Standards on the Performance of Agricultural Exports in Cameroon

The aim of this paper is to assess the effects of quality standards imposed by developed countries on agricultural exports in Cameroon. Based on the quantification technique of Bora and et al. [1], we have constructed an indicator capturing the quality standards imposed by the developed country partners of Cameroon. The empirical analysis is done by applying the Poisson Pseudo-Maximum Likelihood (PPML) estimator to a gravity model on a panel made up of developed countries importing agricultural products from Cameroon. The results show that, over a study period of 2001-2018, compliance with the quality standards imposed by developed countries is restrictive and has a negative impact on agricultural exports in Cameroon. Thus, a 10% strengthening of quality standards results in a decrease of about 2.83% in the volume of agricultural exports to Cameroon. Given the very demanding nature of quality standards, their compliance can enable the Cameroonian agricultural export sector to become more competitive on the international market. We recommend training and support for producers in order to give them the opportunity to comply with the standards.