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Does trade promote peace? squared: a gravity equation in a rectangular panel world

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  • Parlow, Anton
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    Abstract

    The purpose of this paper is to revisit the question if trade promotes peace or not? I account for heterogeneity of trade dyads over time in using panel estimation techniques. The world is modeled as a rectangle. I present models focusing on how conflict affects trade, and in another set of models how trade affects conflict. To account for simultaneity I use past values of trade and conflict, as well an instrumental variable approach. My instruments to explain conflict are military expenditures and a military capability index. The instrumental variable to explain trade is annual rainfall. I find in most setups that trade and interstate conflict are reciprocal. Trade indeed promotes peace because of welfare gained from international trade. Past values of conflict or trade have a negative impact in their respective models. Only after accounting for endogeneity in using an instrumental variable approach, the negative relationship becomes insignificant or positive in some setups. I employ a dynamic panel estimator to deal with possible limitations of the instrumental variables.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36430.

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    Date of creation: 31 Nov 2011
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    Handle: RePEc:pra:mprapa:36430

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    Keywords: Trade; Conflicts; GDP; Gravity model;

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    1. Head, Keith & Mayer, Thierry & Ries, John, 2008. "The Erosion of Colonial Trade Linkages After Independence," CEPR Discussion Papers 6951, C.E.P.R. Discussion Papers.
    2. Philippe Martin & Thierry Mayer & Mathias Thoenig, 2008. "Make Trade Not War?," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 865-900.
    3. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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