Latent Multilateral Trade Resistance Indices: Theory and Evidence

Mardi | 2010-06-22

Wilfried KOCH – James P. LeSAGE – Cem ERTUR

Anderson and van Wincoop (2003) make a convincing argument that traditionalgravity equation estimates are biased by the omission of multilateral resistance terms.They show that these multilateral resistance terms are implicitly de ned by a system ofnon-linear equations involving all regions’ GDP shares and a global interdependencestructure involving trade costs. We show how linearizing the system of non-linearrelationships around a free trade world leads to an interdependence structure that canbe used as a Bayesian prior to produce statistical estimates of the inward and outwardmultilateral resistance indices. This reects a statistical approach that has advantagesover the non-stochastic numerical approach used by Anderson and van Wincoop (2003)to solve for these indices and other approaches proposed in the literature.