Transfers in the gravity equation

This study integrates development aid into a theoretically founded structural gravity model that considers primary and secondary effects of as an income transfer bilateral trade cost determinant. We identify the parameters our using two-stage approach includes state-of-the-art Poisson pseudo-maximum likelihood estimation for sample 132 countries over period 1995 to 2012. The main findings indicate only increases do not have common language, past colonial relationship or RTA. On average, 1 USD additional foreign from all donors recipients’ net imports by around 0.36 USD. Our comparative statics experience reduction in real consumption due recipients increase. also analyze effect on third countries. modelling framework applies other transfers such remittances. Les transferts dans l’équation de gravité. Cette étude contribue à la littérature sur le lien entre l’aide au développement et commerce international en intégrant un modèle structurel gravité avec des fondations théorétiques. Nous pouvons alors mener une analyse plus compète gains l’échange découlant l’aide. identie les paramètres notre manière empirique utilisant approche deux étapes comprenant dernière version du pseudo maximum vraisemblance pour échantillon pays période Nos résultats principaux suggèrent que bilatérale augmente donneur bénéficiaire seulement absence langue commune, relation coloniale passée ou d’accords bilatéraux régionaux. En outre, dollar supplémentaire d’aide tous donneurs importations nettes 0,36 dollar. Notre statique suggère que, malgré effets coûts commerciaux, subissent réduction consommation réelle bénéficiaires augmentation De plus, tiers. Bien cette concerne développement, cadre modélisation se prête également l’analyse d’autres genres comme l’envoi fonds. Foreign provides important monetary resources many low-income low- lower-middle receive worth 3% their respective GDP. In some extreme cases (such Tuvalu after 2008 Guinea-Bissau 1996) is 50% Palau even received more than twice its GDP 1994, year independence. order understand can macroeconomic performance, it flows. First, any nominal effect, would increase relative domestic production, given that, be absorbed, either goods services, investment government expenditure has (Temple Van Sijpe 2017). Second, well documented (Trionfetti 2018) presence costs, terms beyond effects. Third, numerous studies show specifically often impartial but linked higher between recipient donor (Wagner 2003, Silva Nelson 2012, Pettersson Johansson 2013, Martínez-Zarzoso 2015). This, turn, counteract stemming aid. Finally, may benefit (or harm) For instance, intensively with demand incorporates four aforementioned aspects. doing so, presents complete analysis beneficiaries transfers—recipients, countries—and extent which they profit. contribute literature three ways. we develop extension theoretical Anderson van Wincoop (2003) distinguishes aggregate As such, perform analysis, where first hence and, second stage, additionally affect changing costs. best knowledge, are estimator full set fixed demanded theory. use allows us calculate gauge export recipients, countries, including similar way Dekle al. (2007). empirical find robust per positive significant historical, cultural political ties (measured relationship, language RTA participation) controlling general equilibrium suggests average Although burden reduced donors’ exports, total negative give receive, accordance goal Some gain effects, mostly if exporters importers donors. remainder this paper structured follows. Section 2 overview existing literature. section 3, present augmented derive partial Bilateral added 3.2. 4 discusses implementation model, 4.1 describes method used statics. 5, describe data sources (5.1), results (5.2), carry out robustness checks (5.3) report estimates (5.4). conclude 6. related broad strands concerning or, generally, trade. feeds problem. much literature, mechanism at play comprises According studies, arise differences shares transfer. Dixit (1983) studying homogeneous frictionless He deems paradoxes—where effects—mere possibilities. Brakman Marrewijk (1995) tied untied two-country world monopolistic competition manufactured sector. They tying reduce loss recipient. Trionfetti (2018)—as study—terms (2018) context competition, frictions heterogeneous firms. demonstrates welfare occur. strand empirically leads absorption imports. applying dynamic generalized methods moments Aiyar Ruthbah (2008) short run 30% while figure 83% long run. Using vector autoregression Hansen Headey (2010) ratios close 40% small developing Werker (2009) instrumental variable based windfall oil crises. receiving no exports Muslim-majority larger correlated variables. Moreover, most translates levels consumption. Berg (2015), contribution, role independent central banks exchange rate regimes absorption. there investigating helps promote donor's One channel discussed above (Brakman 1995), Djajic (2004) go argue habit formation, giving could serve commercial interests future periods. focus suggest source hence, exports. was author estimate European Union finds Wagner extends evaluate OECD Adding control unobserved he smaller Nilsson (1997), remains significant. German OLS account endogeneity. Like previous obtain statistically results. (2016) sectoral highest machinery, electrical equipment transport equipment. These employing equation treat biased determinants multilateral resistance controlled for. (2012) address issue log-linear approximation these (MRT) proposed Baier Bergstrand (2009). too (2014) include third-country aid, bilateral, country terms. DAC prevalent group share Also, evidence adverse countries’ except EU problem zero flows another key Most log-linearized log right-hand side. implies observations will dropped. remedy add amount argues against practice because defined what constitutes amount. Instead, zero-aid dummy. Rand provide solution expansion factor below yields. check affects through channel, appropriate , avoids Danish Their lower when varies less across still (2017) Dutch case. None papers listed, however, model; nor those take going neighbouring allow problem, 3.1, repercussions different pure determinants. consequence, implications differ reported standard applications. projects. result, unifies Temple detailed theory-consistent analysis. modified same logic class models described Arkolakis (2012). briefly review step, within framework. Within framework, now suppose time t. denote i j tfijt. If tfijt>0 tfijt<0 i. tfijt=−tfjit. Each receives gives multiple Let TFjt=∑itfijt inflows j. assume neutral respect costs; is, ∂τijt/∂tfijt=0. Then, TFjt disposable differs market yjt (GDP). Disposable (TFjt<0) fact every actually reach country, let γ reaching recipient.2 practical terms, interpreted form imports, encompassing indirect channelled items balance payments. Total thus . captures transfer, (4), proportional clearing condition Πit. Since internal costs assumption Πit rise donor. factory gate prices determined (6) decline markets clear. according (7) (3). specific stronger becomes. opposite true Consequently, exceeds income. Additionally, affected since one another. Third face relatively low vis-à-vis able prices, whereas prices. cases, neither unconditional greater country's donors, help lessen 1995). here direct immediate abstract long-term explicitly (Martínez-Zarzoso 2014) sense spent products country. irrespective takes, involve cooperation communication recipient, turn spillover types cooperation, projects implemented agency responsible spending project funds, suppliers advantage. proximity reduces organizational search Hence, them supply decision made autonomously recipient.3 finances difference financed recipient's lies organized faces τijt Note δijt depends negatively case —that exactly otherwise incurred country—there effect. Only expect comparatively transaction should small. allocation explained 1, driven associated pit. Both mirrored does But question whether prevails. hand, response 3.2, two interest δijt, welfare. employ procedure parameters. step consists estimating 8, equation. identifies γ, measures “absorption ratio” (Hansen 2010). δijt. mentioned above, size (11). inflow. way, specify conditioned Equation (12) explains function receipts. Empirically, (θjt−1) error term individual (ηj) (ϑt) component idiosyncratic ujt. three-year averages influence business cycle variation, (2017). 12 All ratio ascribed TFjt/yjt imply bias. Endogeneity becomes concern, exogenous changes external saving components payments trigger outflows. line argument plausible mainly episodes current crises typically exert downward A decrease capital leading corresponding merchandise financial crisis. mean collapse lead assistance case, produce bias coefficient crises, IMF coordination provided concessional loans smooth inflows. exploit plays type (IV) basis scope variables dummy regional agreements (RTAs) j, both being WTO members currency union concern (14) import (Osei 2004, Younas 2008). association likely predicted part temporary shocks. Donors unlikely change short-run fluctuations unless perceived mark permanent shift. reason, μij, following (2007), trends ϕij capture flows, (2014). time-invariant confounding factors possibility constantly decreasing increasing) pair.6 (PPML) advocated Santos Tenreyro (2006). particular, iterative process Larch (2019) enable inclusion high-dimensional effects.7 crucial advantage PPML estimator, shown Fally produces importer–year exporter–year included. reason introducing tantamount conditioning property guarantees consistency (14). kept constant (14), certain conflated. Another (Santos 2011).8 (Yotov 2016), outlined imposing non-linear constraints. constraints comprise condition. While unbiased parameter estimation, operate magnitude direction therefore counterfactual spirit compute estimates. define scenarios. scenario consider abolition assistance. under 2, zero, recipient.9 Thus, suffers own income, subsequent adjustment donor, pairs purpose determine importance overall abolished keeps pairs; shift markets. lose transfers. assess comparing figures 1. values (2019). plug holding Pjt constant. implied (17). Again, value thus, iteratively until converges. estimated balanced panel 2012 (see list table A1 appendix).10 services taken UNCTAD. Data population World Bank (World Development Indicators Database 2015).11 dummies RTAs force unions (CU) Sousa (2012).12 accession dates construct membership website.13 obtained OECD's Assistance Committee. (including aid) At level, Missing treated zeroes. Table A2 appendix reports summary statistics. exercise, proxy Following Yotov (2012), exports.14 stage (equation 12) γ. dependent variables: columns (1) (2), goods; (3) services; (5) (6), combined services. (1), (5), apart (4) mitigate reverse causality. (columns (2)). (4)) zero. expected, comparable goods. assumptions measured column inflow 0.28 When IMF, point 0.357 (column Aid expected bears sign variable. 36% reci