The Customs Union of Belarus, Russia and Kazakhstan

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THE CUSTOMS UNION OF BELARUS, RUSSIA AND KAZAKHSTAN: GRAVITY MODEL APPROACH TO ESTIMATION OF TRADE FLOWS CHANGES by Tauhen Dzianis A thesis submitted in partial fulfillment of the requirements for the degree of MA in Financial Economics Kyiv School of Economics 2012

Thesis Supervisor:

Professor Oleksandr Shepotylo

Approved by ___________________________________________________ Head of the KSE Defense Committee, Professor Collier Irwin __________________________________________________ __________________________________________________ __________________________________________________ Date ___________________________________

Kyiv School of Economics Abstract

THE CUSTOMS UNION OF BELARUS, RUSSIA AND KAZAKHSTAN: GRAVITY MODEL APPROACH TO ESTIMATION OF TRADE FLOWS CHANGES

by Tauhen Dzianis Thesis Supervisor: Professor Oleksandr Shepotylo

This study measures the anticipatory trade creation and trade diversion effects of Customs Union of Belarus, Russia and Kazakhstan (CUBRK) for chosen industries. Those effects are estimated using Gravity Model of Trade (GMT). Log-linerized and exponential specifications of GMT are estimated with the help of OLS and Poisson-Pseudo-Maximum-Likelihood (PPML) estimators. Models include time fixed effects and variables which deal with endogeneity issues. The research data contain large amount of zeros, so OLS is estimated mainly for comparison reasons, since it was proven to be biased in case of zero trade flows. The inference is made based on PPML estimation. In order to capture gradual changes in trade flows, dynamic models are estimated along with static models. The results show strong evidence of static and dynamic anticipation of trade creation.

TABLE OF CONTENTS

Chapter 1: INTRODUCTION ....................................................................................... 1 Chapter 2: LITERATURE REVIEW ........................................................................... 5 Chapter 3: METHODOLOGY

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