The WTO puzzle, multilateral resistance terms and multicollinearity

Juyoung Cheong, Do Won Kwak, Kam Ki Tang

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

Since Rose's (2004) striking finding of negligible WTO trade effects, numerous studies have attempted to solve the so-called WTO puzzle. These studies have progressively improved model specifications to control for potential sources of bias, but they often lead to conflicting results. Multilateral resistance terms (MRTs) are considered to be one of the most crucial factors to be accounted for to avoid the omitted variable bias in the gravity model. What has gone unnoticed, however, is that the control for MRTs leads to near-prefect multicollinearity because of the structural relationship between the variables that measure the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO) membership status of any country pairs. This multicollinearity contributes to the fragility of the WTO effect estimates, as it dramatically increases SEs. In this article, we explain how this multicollinearity arises and provide evidence of it.

Original languageEnglish
Pages (from-to)928-933
Number of pages6
JournalApplied Economics Letters
Volume21
Issue number13
DOIs
Publication statusPublished - 2014 Sep

Keywords

  • WTO puzzle
  • World Trade Organization
  • gravity model
  • multicollinearity
  • multilateral resistance terms

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint Dive into the research topics of 'The WTO puzzle, multilateral resistance terms and multicollinearity'. Together they form a unique fingerprint.

  • Cite this