Abstract and Keywords
Recent advances in economics stress the need to control for multilateral resistance or country-level unobservables that may affect trade in gravity model estimations. The interpretation of coefficients when controlling for multilateral resistance is different than when dyadic and year fixed effects are included. While country-year dummies do control for multilateral resistance, the number needed in most models exceeds computing capacity, and alternative methods have been devised. These models can only answer whether trade between GATT members increased more than their trade with non-GATT members. Models that include dyadic and year fixed effects can answer whether institutions were trade-creating and trade-diverting as well as the relative effects of trade creation and trade diversion. But the effects of institutions will probably be overestimated. This chapter compares the results of several methods to control for multilateral resistance by examining the GATT/WTO’s effects on trade using real-world data.
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