Regional transport infrastructure and trade flows in the EU

How does regional transport infrastructure affect bilateral trade flows? An extensive literature on infrastructure and trade flows has attempted to answer this question by using country level or regional data. This current thesis focuses on the European Union (EU) and investigates the effect of transport infrastructure on international and intranational trade flows using NUTS 2 (Nomenclature of Territorial Units for Statistics) level data from 200 EU regions between the years 2000-2010. It is the first study to focus on flows and infrastructure at regional level in a multi-country setting. As in the previous studies in the infrastructure literature, the gravity equation is used to explain the relationship between the regional transport infrastructure and trade in the EU. Various alternative estimation methods such as Fixed Effects, PPML, lagged variables, instrumental variables (IV) and Hausman-Taylor IV method are used in order to overcome the issues related to heteroskedasticity, reverse causality and biased estimates that are frequently encountered with gravity equation. In the presence of bilateral and time fixed effects, the results suggest an increase of 0.05 to 0.13 per cent bilateral trade as infrastructure measures increase by 1 per cent. The robustness check follows that the estimates are not sensitive to the choice of unit of measure for the infrastructure variables.