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Natural Disasters and the Effect of Trade on Income: A New Panel IV Approach

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  • Gabriel J. Felbermayr
  • Jasmin Gröschl

Abstract

Does trade openness cause higher GDP per capita? Since the seminal instrumental variables (IV) estimates of Frankel and Romer [F&R](1999) important doubts have surfaced. Is the correlation spurious and driven by omitted geographical and institutional variables? In this paper, we generalize F&R’s geography-based empirical strategy to a panel setting. We observe that natural disasters affect bilateral trade, and that this effect is conditioned by geographical variables such as distance to financial centers or area. This allows us to use interactions between geography and the incidence of disasters at the bilateral level to construct an instrument for multilateral openness that varies across countries and time. The instrument can be used in panel setups where it is possible to fully control for geographical and historical determinants of countries’ performances as well as for the direct effect of disasters. We find that the elasticity of income with respect to openness is about 0.69, but that substantial heterogeneity exists across country samples.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3541.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3541

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Keywords: per capita income; openness; natural disasters; instrumental variable estimation; panel econometrics;

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Cited by:
  1. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Munich Reprints in Economics 19288, University of Munich, Department of Economics.
  2. 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.
  3. Niklas Potrafke, 2014. "The Evidence on Globalization," CESifo Working Paper Series 4708, CESifo Group Munich.
  4. 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.
  5. Gabriel J. Felbermayr & Jasmin Gröschl, 2013. "Naturally Negative: The Growth Effects of Natural Disasters," CESifo Working Paper Series 4439, CESifo Group Munich.

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