Exploring the Impact of Economic Integration Agreements Through Extreme Bounds Analysis

Byungyul Park, John C. Beghin
June 2020  [20-WP 605]

This paper provides an empirical strategy guided by the data to estimate the long-term effect of Economic Integration Agreements (EIAs) on trade flows. The strategy uses Extreme Bounds Analysis (EBA) to guide the choice of lags and leads in the effects, the periodicity of time intervals if any, and starting year and associated data exclusions. We show that arbitrarily selected intervals and the starting year can result in non-robust estimates of the long-term effect of EIAs on trade flows. The empirical strategy follows two steps: EBA firstly sifts lags and leads of EIAs robustly related with trade flows from candidates and then these are in turn included in the gravity equation to estimate the long-term aggregate effect of EIAs on trade. We find that various lags and one lead are robustly and positively related to trade flows, leading to the long-term effect of 64%. The long-term estimate obtained from EBA-based estimation has a larger contemporaneous effect and smaller lagged effects compared to previous studies relying on subjective choices of lags and leads and periodicity.

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