Modeling International Trade of Forest Products: Application of PPML to a Gravity Model of Trade

To model international trade of forest products we employ a gravity model of trade. The impact on exports of importer GDP, exporter GDP, and distance between countries are estimated using OLS and Poisson pseudo-maximum likelihood (PPML). When estimating the log-linearized gravity model (OLS), two issues arise. First, potential bias associated with truncation of all zero-trade observations due to the non-existence of the natural log of zero. Second, heteroskedasticity can bias results from the log-linearized gravity model due to the multiplicative error term of the stochastic gravity model. To address these two issues, we propose avoiding the log-linearized gravity model and instead estimate the non-linear gravity model via PPML. To estimate the model, trade data is compiled from the Food and Agriculture Organization of the United Nations (FAO). The observation window is from 1997 to 2014 and covers thirteen product categories at a country-pair level. In our estimation, we find systematic differences in es...