Decomposition of Bilateral Trade Flows Using a Three-Dimensional Panel Data Model

TL;DR

This paper introduces a novel three-dimensional panel data model to decompose bilateral trade flows, identifying global and country-specific shocks, with applications to international trade analysis and empirical validation through simulations and real data.

Contribution

It proposes a new estimation method for separating pervasive and nonpervasive shocks in multi-dimensional panel data, extending asymptotic theory to diverging dimensions.

Findings

Successfully decomposes trade flows into shocks.

Validates the approach with simulations.

Analyzes trade networks of APEC and EU.

Abstract

This study decomposes the bilateral trade flows using a three-dimensional panel data model. Under the scenario that all three dimensions diverge to infinity, we propose an estimation approach to identify the number of global shocks and country-specific shocks sequentially, and establish the asymptotic theories accordingly. From the practical point of view, being able to separate the pervasive and nonpervasive shocks in a multi-dimensional panel data is crucial for a range of applications, such as, international financial linkages, migration flows, etc. In the numerical studies, we first conduct intensive simulations to examine the theoretical findings, and then use the proposed approach to investigate the international trade flows from two major trading groups (APEC and EU) over 1982-2019, and quantify the network of bilateral trade.