A1392
Title: Gravity models with smooth time-varying coefficients and fixed effects
Authors: Juan Manuel Rodriguez-Poo - Universidad de Cantabria (Spain) [presenting]
Daniel Henderson - University of Alabama (United States)
Alexandra Soberon - Universidad de Cantabria (Spain)
Stefan Sperlich - University of Geneva (Switzerland)
Abstract: Gravity models with exporter-time, importer-time, and pair fixed effects are now standard for analyzing bilateral flows across a range of settings (e.g., international trade, foreign direct investment, remittances, and migration) where unobserved heterogeneity across origins, destinations, pairs, and time must be controlled to draw credible causal inference. In long panels, however, two empirical challenges increasingly dominate: (i) key policy elasticities may evolve over time, and (ii) the high dimensionality of fixed effects yields an incidental-parameter problem that complicates estimation and inference. A time-varying-coefficient gravity model in levels is proposed together with a concentrated local-moment estimator that eliminates pair fixed effects, leverages smoothness in time, accommodates zeros, and avoids log-linearization. Under fixed cross-sectional dimension and large time dimension, asymptotic normality of the estimator is established and practical bootstrap inference with optional bias correction is provided. Simulation evidence confirms solid finite-sample performance when bilateral covariates exhibit sufficient temporal variation. Several applications uncover economically meaningful dynamics missed by common parametric trend interactions, and diagnose when data provide too little time variation for flexible estimation.
