Out-of-sample gravity predictions and trade policy counterfactuals (opens in new tab)

Gravity equations are often used to evaluate the effects of trade policies, such as regional trade agreements. We argue that their suitability for this purpose critically depends on their ability to produce unbiased out-of-sample predictions. We propose a methodology to evaluate the out-of-sample predictions obtained with gravity equations and with machine learning methods. We find that the 3-way gravity model is difficult to beat when the p...