Trading Partners and Trading Volumes: Implementing the Helpman–Melitz–Rubinstein Model Empirically
| Date | 01 February 2015 |
| Published date | 01 February 2015 |
| DOI | http://doi.org/10.1111/obes.12055 |
| Author | Silvana Tenreyro,J. M. C. Santos Silva |
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©2013 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 77, 1 (2015) 0305–9049
doi: 10.1111/obes.12055
Trading Partners andTrading Volumes: Implementing
the Helpman–Melitz–Rubinstein Model Empirically*
J. M. C. Santos Silva† and Silvana Tenreyro‡
†University of Essex and CEMAPRE, Wivenhoe Park, Colchester CO4 3SQ UK
(e-mail: jmcss@essex.ac.uk)
‡London School of Economics, CFM, CEP and CEPR., St. Clement’s Building, Houghton
St., London, WC2A 2AE UK (e-mail: s.tenreyro@lse.ac.uk)
Abstract
Helpman, Melitz and Rubinstein [Quarterly Journal of Economics (2008) Vol. 123, pp.
441–487] (HMR) present a rich theoretical model to study the determinants of bilateral
trade flows across countries. The model is then empirically implemented through a two-
stage estimation procedure. We argue that this estimation procedure is only valid under
the strong distributional assumptions maintained in the article. Statistical tests using the
HMR sample, however, clearly reject such assumptions. Moreover, we perform numerical
experiments which show that the HMR two-stage estimator is very sensitive to departures
from the assumption of homoskedasticity. These findings cast doubts on any inference
drawn from the empirical implementation of the HMR model.
I. Introduction
In a highly insightful and stimulating article, Helpman, Melitz and Rubinstein (2008),
hereafter HMR, present a theoretical framework to study bilateral trade flowsacross coun-
tries. The model is especially appealing because it can potentially explain three prevalent
regularities in trade data: the asymmetry in bilateral trade flows between country pairs; the
high prevalence of zeroes (in either one or both directions of bilateral trade flows) and the
remarkably good fit of the gravity equation.
HMR use their conceptual framework to developa two-stage estimation procedure that
generalizes the empirical gravity equation by taking into account the extensivemargin (the
decision to export from jto i) and the intensive margin (the volume of exports from jto
i, conditional on exporting).1Although HMR’s model makes a significant step towards a
*We are most grateful to three anonymous referees and to the Editors for many helpful suggestions. We are
also grateful to Elhanan Helpman, Marc Melitz and Yona Rubinstein for generously sharing their data. We thank
especially Marc Melitz for useful conversations. Santos Silva gratefully acknowledges the partial financial support
from Funda¸c˜ao para a Ciˆencia e Tecnologia (Programme PEst-OE/EGE/UI0491/2013).Tenreyro gratefully acknowl-
edges financial support from the European Research Council under the European Community’s ERC starting grant
agreement 240852.
JEL Classification numbers: C13, C50, F10.
1An alternative two-stage procedure to estimate the extensive and intensive margins is proposed by Egger et al.
(2011).
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