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

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Document pages: 66 pages

Abstract: This study decomposes the bilateral trade flows using a three-dimensionalpanel data model. Under the scenario that all three dimensions diverge toinfinity, we propose an estimation approach to identify the number of globalshocks and country-specific shocks sequentially, and establish the asymptotictheories accordingly. From the practical point of view, being able to separatethe pervasive and nonpervasive shocks in a multi-dimensional panel data iscrucial for a range of applications, such as, international financial linkages,migration flows, etc. In the numerical studies, we first conduct intensivesimulations to examine the theoretical findings, and then use the proposedapproach to investigate the international trade flows from two major tradinggroups (APEC and EU) over 1982-2019, and quantify the network of bilateraltrade.

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