A. Colin Cameron with Natasha Chernyshoff
(nee Natalia Golotvina)
“Estimation of
Country-Pair Data Models Controlling for Clustered
Errors”
We consider cross-section regression models for country-pair data, such
as gravity models for trade volume between countries or models of
exchange rate volatility, allowing for the presence of country-specific
errors. This induces clustered errors in a nonstandard setting. OLS
standard errors that ignore this clustering are greatly underestimated.
Under the assumption of random country-specific effects we provide
analytical results that permit more efficient GLS estimation even in
settings where the number of unique country-pairs is very large. We
include applications to international data on real exchange rates and
on bilateral trade that provided the motivation for this paper. The
results are more generally applicable to regression with paired data.