Trade is spatial in nature. However, when specifying trade regressions, spatial issues are typically not accounted for in a satisfactory way. We specify a trade model which relates to the effects that the introduction of the euro had on exports for the euro countries. Our model contains country pair fixed effects and error terms which are spatially and time autocorrelated, as well as heteroskedastic. Our spatial weighting matrix has unique characteristics. Our model also allows for endogenous regressors, and so we estimate it by an instrumental variable procedure.
In the Neighborhood: The Trade Effects of the Euro in a Spatial FrameworkHarry H. Kelejian, George S. Tavlas, and Pavlos Petroulas ,
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Regional Science and Urban Economics