In cross-section gravity models the two-way cluster-robust standard errors of the Poisson pseudo maximum likelihood (PPML)
estimates tend to be considerably downward biased. However, two-way clustering can be avoided if intra-cluster correlation
is induced by country-specific trade shocks with uniform pass through (equi-correlation) and the gravity model includes exporter
and importer country fixed effects. In this case the pseudo-within-transformation of the PPML estimator projects out the corresponding
components of the disturbances. In Monte Carlo simulations the Pustejovsky and Tipton (2018) bias correction for independent
disturbances (i.e., ignoring clustering) reveals just a small downward bias of the estimated standard errors and confidence
intervals with nearly correct coverage rates. Under deviations from equicorrelation the bias is somewhat larger, but still
comparable to the bias of the cluster-robust standard errors with Pustejovsky and Tipton (2018) bias correction.
Research group:Industrial, Innovation and International Economics