Problem with the multicollinearity in trade gravity model estimated by ppml

[Thuy Dang]

Hi everyone,

I'm using ppmlhdfe in STATA to estimate my trade gravity model.

This is my code in STATA:
ppmlhdfe trade fta log_tariff log_ntmA log_ntmD log_ntmE i.groupID i.imp_p_HS6, cluster(iso3num_d)

in which,
- non-tariff measures are disaggregated by type (A,B,E,D) and are count variables.
- fta is a binary variable
- i.groupID: importer-year fixed effects
- i.imp_p_HS6: importer-product fixed effects
- robust SE is clustered by importer

I do not include any fixed effects for exporter, because my data only has one exporter.

If I exclude log_tariff variable, the coefficient of log_ntmA becomes significant (p<0.01). However, whenever I include log_tariff, the coefficient of log_ntmA becomes insignificant, though it does not flip sign.

Can I exclude my log_tariff variable from the regression? Or what could I do to fix it?

Please kindly help! Thank you very much!

P/s: Joao Santos Silva I follow your answer on different threads on this gravity model topic, if you have some times, please kindly help me. Thank you!

[Joao Santos Silva]

Dear Thuy Dang,

I am not sure if I understand what the problem is. It is natural that when you drop a variable the results for the others change, so there is nothing special about what you find. As for deciding whether to keep the log_tariff variable, that is up to you and depends on what your objective is. As an aside, I suggest you absorb the fixed effects; check the help file for examples.

Best wishes,

Joao