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A further investigation of the link between trade and income

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  • Jan Ondrich
  • J. David Richardson
  • Shuo Zhang
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    Abstract

    The link between openness and income has received increasing attention as countries try to justify their trade-promoting policies. Recent work of Frankel & Romer (1999) examines the effect of trade on income. We explore how the estimates of the trade effect change when we relax their assumption of heteroscedasticity in the bilateral trade equation they use to construct the instrument for the IV regression. Because the instrument is constructed through a nonlinear transformation, unequal disturbance variances imply inconsistency and not just inefficiency of the Frankel-Romer estimates. We find a smaller positive effect of trade than that found by Frankel & Romer.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/10168730500515464
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Economic Journal.

    Volume (Year): 20 (2006)
    Issue (Month): 1 ()
    Pages: 19-36

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    Handle: RePEc:taf:intecj:v:20:y:2006:i:1:p:19-36

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    Related research

    Keywords: Trade; income; heteroscedasticity; instrumental variable;

    References

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    1. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    2. Wacziarg, Romain, 2000. "Measuring the Dynamic Gains from Trade," Research Papers 1654, Stanford University, Graduate School of Business.
    3. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," NBER Working Papers 7081, National Bureau of Economic Research, Inc.
    4. Anderson, James E & Neary, J Peter, 1992. "Trade Reform with Quotas, Partial Rent Retention, and Tariffs," Econometrica, Econometric Society, vol. 60(1), pages 57-76, January.
    5. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
    6. Manning, Willard G., 1998. "The logged dependent variable, heteroscedasticity, and the retransformation problem," Journal of Health Economics, Elsevier, vol. 17(3), pages 283-295, June.
    7. Durlauf, Steven N., 2001. "Manifesto for a growth econometrics," Journal of Econometrics, Elsevier, vol. 100(1), pages 65-69, January.
    8. Chow, Peter C. Y., 1987. "Causality between export growth and industrial development : Empirial evidence from the NICs," Journal of Development Economics, Elsevier, vol. 26(1), pages 55-63, June.
    9. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-94, September.
    10. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
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    Cited by:
    1. Stanislav Cernosa, 2011. "Openness to Trade, Migration and Foreign Direct Investments of the EU," WIFO Working Papers 401, WIFO.

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