New Trade Theory and Aggregate Export Equations: An Application of Panel Cointegration

Paper number: 99/17

Paper date: April 1999

Year: 1999

Paper Category: Discussion Paper


Rebecca Driver*
Bank of England


Simon Wren-Lewis
University of Exeter


New trade theory suggests that improvements in the variety and quality of products may be as important as price competitiveness as an explanation of trade flows. This paper tests this proposition for export volumes for the G7 using relative cumulated investment as a proxy for innovation. Positive results are obtained using new panel cointegration techniques as well as more traditional methodologies.

JEL Classification Nos: F12; F14; C23
Keywords: New trade theory, innovation, exports, panel cointegration.

Corresponding Author: Rebecca Driver, Monetary Analysis Division 4, Bank of England, Threadneedle Street, London, EC2R 8AH, email:


* This work was largely completed while both authors were based at the University of Exeter, but Rebecca Driver is now at the Bank of England. Work was made possible by grant R000237041 from the ESRC. Our thanks to Peter Pedroni, Ian Marsh, Campbell Leith, Nigel Pain, Elias Tzavalis, Giacomo Barisone, Paul Fisher and Simon Price, and participants at seminars at the Bank of England and the 1998 Warwick Macromodelling Bureau Conference and the 1999 Royal Economic Society Conference. The views expressed in this paper are not those of the Bank of England and responsibility for any errors remains ours alone.