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Bias-corrected cluster-robust standard errors for fixed effects PPML estimators of gravity panel models with autocorrelated disturbances

Michael Pfaffermayr

Empirical Economics2026https://doi.org/10.1007/s00181-026-02888-4article
AJG 2ABDC A
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0.37

Abstract

Panel gravity models with country-pair and time variation typically feature autocorrelated disturbances calling for country-pair clustered standard errors of the estimated structural parameters. Yet, Monte Carlo simulations reveal a pronounced downward bias of the country-pair clustered standard errors. With an estimated autocorrelation parameter of the disturbances at hand, it is straightforward to form a working variance that accounts for autocorrelation within country-pairs and to apply the Pustejovsky and Tipton (JBES 36:672–683, 2018)-bias correction. Monte Carlo simulations illustrate that this bias correction nearly eliminates the bias and yields correct coverage rates of the confidence intervals. Using the cluster-specific pairs bootstrap to form percentile confidence intervals also performs well and exhibits correct coverage rates.

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https://doi.org/https://doi.org/10.1007/s00181-026-02888-4

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@article{michael2026,
  title        = {{Bias-corrected cluster-robust standard errors for fixed effects PPML estimators of gravity panel models with autocorrelated disturbances}},
  author       = {Michael Pfaffermayr},
  journal      = {Empirical Economics},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1007/s00181-026-02888-4},
}

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