Staff Working Paper No. 951
By Rebecca Freeman, Mario Larch, Angelos Theodorakopoulos and Yoto Yotov
We propose new methods to identify the full impact of country‑specific characteristics on bilateral trade flows within the framework of ‘the new quantitative trade model’. We complement theory with a simple two‑stage estimating procedure, and offer a proof of concept by quantifying the impact of country‑specific research and development expenditure on trade. Results suggest a positive relationship overall, but a larger impact on international (versus domestic) trade. Further, our methodology allows us to recover trade elasticity estimates without the need for price/tariff data. Bringing this to the sectoral level, we obtain estimates of the trade elasticity for manufacturing, services, and tradable versus non‑tradable sectors.