Dear community,

I want to estimate a gravity model to examine the impact of interstate wars on bilateral trade flows for the period 1870-2014. I will provide a little explanation of the model to give an insight into what I am trying to do.

I specified a model as follows: ln(trade) = a + ln(dist) + war + wardur + countwar + yearcounter + power + alliance + contig + colborder + ln(cincA) ln(cincB)
All the variables are in country-pairs, except for ln(cincA) and ln(cincB), which are the national capabilities of country A and country B, respectively. The rest are specified as:
  • war is a dummy variable equals 1 if country pair is in conflict at time t, 0 otherwise
  • wardur is the duration of the war at time t (if war started in 1942, and we are at time t=1945, then wardur=3)
  • countwar is the number of wars that the country pair has been involved at time t
  • yearcounter is just a counter for the years for each country pair (not sure if I need this)
  • power is a categorical variable (=1 if both countries are major powers;=2 if major/minor power;=3 if minor/minor power)
  • alliance is a dummy variable which varies over time; if country-pair is in an alliance agreement at time t
  • contig;colborder are time-invariant dummy variables per country-pair (I also include few other dummies not presented here)
I have searched the forum and papers for a while, but I feel more confused than ever. So my question is:
1. Are there problems with the variable specifications for the gravity model? that some are country-pair specified and some country specified?
2. Is it ok to only have country-pairs instead of origin and destiny country for the bilateral trade estimation?
3. Since fixed effects drop time-invariant variables but I would like to account for them, can I use the ppml command?

So far I have made a panel data:

Array

And run a ppml regression, but I account for trade in levels, and not logtrade as I read here and in referred papers:

ppml trade lndist war wardur countwar yearcounter power alliance contig colborder lncinc1 lncinc2



Array

I am totally confused which type of fixed effects I should use, country-pairs fixed effects, time fixed effects, origin and destination fixed effects?

Any help will be highly appreciated! Thank you!
P.S: Sorry for not using the Stata output, I had issues to find how to do this.

Best,
Ilona