Extended Gravity Panel Data Model of Polish Foreign Trade

The goal of this article is to investigate the determinants of the pattern of bilateral trade flows of Poland with its major trade partners with the use of trade gravity model approach. The analysis is carried out for 181 trade partners of Poland in the period 1999-2006. In the basic version of the trade gravity model we take into account only the standard factors as suggested by the literature of the subject. In its extended version we control for several additional factors including: quality of institutions, impact of regional and bilateral trade agreements or exchange rate volatility. In order to obtain unbiased results we utilize the Prais-Winsten regression with Panel Corrected Standard Errors (PCSE). In most of the cases the coefficients for the traditional gravity determinants are economically sensible and their impact on the dependant variable is statistically significant. The impact of market size, distance or quality of institutions are in line with our expectations. The role of migrants as proxied by the size of Polish diaspora is rather large. Increase in the size of Polish diaspora of 1 per cent increases bilateral trade by approx. 0.2 per cent. Foreign exchange rate volatility has an adversely negative impact on the trade flows. The unrealized potential of a membership in the eurozone could be judged relatively high. The results concerning trade agreements are however rather unanticipated.