The paper
This paper demonstrates an important accounting property of Poisson estimation in gravity models. Properly specified Poisson models preserve aggregate trade totals when fitting bilateral flows.
Research findings
- The Poisson first-order conditions make fitted and observed trade totals coincide in the standard gravity specification.
- The paper’s empirical comparison shows that log-linear OLS and other quasi-maximum likelihood estimators can generate substantial discrepancies in aggregate fitted trade.
Implications for applied research
- Use the adding-up property when building gravity models that must reconcile bilateral estimates with aggregate trade accounts.
- Check aggregate fitted flows as part of model validation, alongside the economic interpretation of estimated coefficients.