The Log of Gravity

@article{Silva2006TheLO,
  title={The Log of Gravity},
  author={J. M. C. S. Silva and Silvana Tenreyro},
  journal={The Review of Economics and Statistics},
  year={2006},
  volume={88},
  pages={641-658}
}
Although economists have long been aware of Jensen's inequality, many econometric applications have neglected an important implication of it: under heteroskedasticity, the parameters of log-linearized models estimated by OLS lead to biased estimates of the true elasticities. We explain why this problem arises and propose an appropriate estimator. Our criticism of conventional practices and the proposed solution extend to a broad range of applications where log-linearized equations are estimated… Expand
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