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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

Related research

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. Gabriel J. Felbermayr & Jasmin Gröschl, 2013. "Naturally Negative: The Growth Effects of Natural Disasters," CESifo Working Paper Series 4439, CESifo Group 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 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.
  4. 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.

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