Cookies?
Library Header Image
LSE Research Online LSE Library Services

The log of gravity

Santos Silva, Joao and Tenreyro, Silvana (2005) The log of gravity. 701. Centre for Economic Performance, London School of Economics and Poltical Science, London, UK.

[img]
Preview
PDF
Download (469kB) | Preview
Identification Number: 701

Abstract

Although economists have long been aware of Jensen's inequality, many econometric applications have neglected an important implication of it: the standard practice of interpreting the parameters of log-linearized models estimated by ordinary least squares as elasticities can be highly misleading in the presence of heteroskedasticity. This paper explains why this problem arises and proposes an appropriate estimator. Our criticism to conventional practices and the solution we propose extends to a broad range of economic applications where the equation under study is log-linearized. We develop the argument using one particular illustration, the gravity equation for trade, and apply the proposed technique to provide new estimates of this equation. We find significant differences between estimates obtained with the proposed estimator and those obtained with the traditional method. These discrepancies persist even when the gravity equation takes into account multilateral resistance terms or fixed effects

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2005 J. Santos Silva and S. Tenreyro
Subjects: H Social Sciences > HB Economic Theory
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Date Deposited: 06 Mar 2008 12:04
Last Modified: 01 Oct 2010 08:51
URI: http://eprints.lse.ac.uk/id/eprint/3744

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics