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Natural disasters and the effect of trade on income: A new panel IV approach

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  • Felbermayr, Gabriel
  • Gröschl, Jasmin

Abstract

Natural disasters affect bilateral trade. We use this fact to generalize the instrumental variables strategy of Frankel and Romer (1999) to a panel setup. This allows revisiting an old question: Does openness cause per capita GDP? We work with a modified gravity framework in which we interact foreign natural disasters with geography. Predicting the exogenous component of bilateral trade flows and aggregating over trade partners, we obtain a time-varying instrument for multilateral openness of a country. Controlling for constant determinants of income (history, geography) by means of fixed effects, we find a robust positive effect of trade on income. Averaging 0.74, the estimated elasticity is substantially smaller than the one obtained in the cross-section. Poor or non-OECD countries feature a larger elasticity.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 58 (2013)
Issue (Month): C ()
Pages: 18-30

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Handle: RePEc:eee:eecrev:v:58:y:2013:i:c:p:18-30

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Web page: http://www.elsevier.com/locate/eer

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Keywords: Per capita income; Openness; Natural disasters; Gravity; Instrumental variable estimation; Panel econometrics;

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Citations

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Cited by:
  1. Niklas Potrafke, 2013. "Globalization and Labor Market Institutions: International Empirical Evidence," Ifo Working Paper Series Ifo Working Paper No. 154, Ifo Institute for Economic Research at the University of Munich.
  2. Gabriel Felbermayr & Mario Larch, 2014. "Transatlantic Free Trade: Questions and Answers from the Vantage Point of Trade Theory," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 14(4), pages 03-17, 01.
  3. Gabriel J. Felbermayr & Jasmin Gröschl, 2013. "Naturally Negative: The Growth Effects of Natural Disasters," CESifo Working Paper Series 4439, CESifo Group Munich.
  4. Niklas Potrafke, 2014. "The Evidence on Globalization," CESifo Working Paper Series 4708, CESifo Group Munich.
  5. Gabriel Felbermayr & Jasmin Gröschl, 2013. "Natürlich negativ: Der Wachstumseffekt von Naturkatastrophen," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 66(19), pages 16-22, October.

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