Gravity Model by Panel Data Approach: An Empirical Application with Implications for the ASEAN Free Trade Area

Abstract

This paper examines the determinants of export flows of countries in the ASEAN Free Trade Area (AFTA) through estimations of panel data using a gravity model. In particular, the paper employs the Hausman-Taylor (HT) estimation for a country panel data of thirty-nine countries during the period 1988–2002 based on a two-way error component form of the gravity model. The estimations show that export flows increased proportionately with GDP, and that the formation of AFTA has resulted in significant trade creation among its members. Finally, the paper suggests that trade facilitation policy can play an important role in setting the stage for AFTA’s transition to a Free Trade Area.