Bilateral Trade Creation Caused by D8 Formation among its Member Countries: The Difference-in-Differences Approach

During recent years, the growth of international trade has been more than that of world output, and countries have shown more interest in forming regional unions and agreements to increase their trade. The aim of this study is to estimate the net effect of D8 formation on trade of its member countries. In this regards, a gravity model has been applied using panel data method for period 1990-2014, in accordance with a Difference-in-Differences (DID) approach and Poisson-Pseudo maximum likelihood method. The D8 countries are selected as target group and select member countries of Organization of Islamic Cooperation are chosen as control group. Our Results show that the net effect of D8 formation on trade among its member countries is positive and significant. Also, the bilateral trade among member countries has had a direct relationship with their size and common language and inverse relation with the distance between them.