IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v58y2013icp18-30.html
   My bibliography  Save this article

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

Author

Listed:
  • 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.

Suggested Citation

  • Felbermayr, Gabriel & Gröschl, Jasmin, 2013. "Natural disasters and the effect of trade on income: A new panel IV approach," European Economic Review, Elsevier, vol. 58(C), pages 18-30.
    • Handle: RePEc:eee:eecrev:v:58:y:2013:i:c:p:18-30
    DOI: 10.1016/j.euroecorev.2012.11.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292112001547
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    2. Yang Dean, 2008. "Coping with Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2002," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-45, June.
    3. Buch, Claudia M. & Toubal, Farid, 2009. "Openness and growth: The long shadow of the Berlin Wall," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 409-422, September.
    4. Martin Gassebner & Alexander Keck & Robert Teh, 2010. "Shaken, Not Stirred: The Impact of Disasters on International Trade," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 351-368, May.
    5. Rose, Andrew K. & Spiegel, Mark M., 2009. "International financial remoteness and macroeconomic volatility," Journal of Development Economics, Elsevier, vol. 89(2), pages 250-257, July.
    6. Stock, James H. & Watson, Mark, 2008. "Heteroskedasticity-Robust Standard Errors for Fixed Effects Panel Data Regression," Scholarly Articles 28461843, Harvard University Department of Economics.
    7. Jeffrey Frankel, 2011. "Are Bilateral Remittances Countercyclical?," Open Economies Review, Springer, vol. 22(1), pages 1-16, February.
    8. Dollar, David & Kraay, Aart, 2002. "Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
    9. Baier, Scott L. & Bergstrand, Jeffrey H., 2009. "Bonus vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation," Journal of International Economics, Elsevier, vol. 77(1), pages 77-85, February.
    10. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
    11. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    12. Irwin, Douglas A. & Tervio, Marko, 2002. "Does trade raise income?: Evidence from the twentieth century," Journal of International Economics, Elsevier, vol. 58(1), pages 1-18, October.
    13. Francisco Alcalá & Antonio Ciccone, 2004. "Trade and Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 613-646.
    14. Noy, Ilan, 2009. "The macroeconomic consequences of disasters," Journal of Development Economics, Elsevier, vol. 88(2), pages 221-231, March.
    15. Mark Skidmore & Hideki Toya, 2002. "Do Natural Disasters Promote Long-Run Growth?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 664-687, October.
    16. Torsten Persson & Guido Tabellini, 2005. "The Economic Effects of Constitutions," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661926, January.
    17. Francisco Rodriguez & Dani Rodrik, 2001. "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence," NBER Chapters,in: NBER Macroeconomics Annual 2000, Volume 15, pages 261-338 National Bureau of Economic Research, Inc.
    18. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
    19. Engerman, Stanley L., 2003. "Comment on: Tropics, germs and crops: How endowments influence economic development," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 41-47, January.
    20. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    21. Avik Chakrabarti, 2000. "Does Trade Cause Inequality?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 25(2), pages 1-21, December.
    22. Redding, Stephen & Venables, Anthony J., 2004. "Economic geography and international inequality," Journal of International Economics, Elsevier, vol. 62(1), pages 53-82, January.
    23. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 407-437.
    24. Crespo Cuaresma & Hlouskova & Obersteiner, 2008. "Natural Disasters As Creative Destruction? Evidence From Developing Countries," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 214-226, April.
    25. James H. Stock & Mark W. Watson, 2008. "Heteroskedasticity-Robust Standard Errors for Fixed Effects Panel Data Regression," Econometrica, Econometric Society, vol. 76(1), pages 155-174, January.
    26. Parente, Paulo M.D.C. & Santos Silva, J.M.C., 2012. "A cautionary note on tests of overidentifying restrictions," Economics Letters, Elsevier, vol. 115(2), pages 314-317.
    27. Daniel J. Henderson & Daniel L. Millimet, 2008. "Is gravity linear?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 137-172.
    28. Arturo Galindo & Alejandro Izquierdo & Liliana Rojas-Suarez, 2010. "Financial Integration and Foreign Banks in Latin America: How Do They Impact the Transmission of External Financial Shocks?," Research Department Publications 4651, Inter-American Development Bank, Research Department.
    29. Eduardo Cavallo & Andrew Powell & Oscar Becerra, 2010. "Estimating the Direct Economic Damages of the Earthquake in Haiti," Economic Journal, Royal Economic Society, vol. 120(546), pages 298-312, August.
    30. Jeffrey A. Frankel & Andrew K. Rose, 2005. "Is Trade Good or Bad for the Environment? Sorting Out the Causality," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 85-91, February.
    31. James Feyrer, 2009. "Trade and Income -- Exploiting Time Series in Geography," NBER Working Papers 14910, National Bureau of Economic Research, Inc.
    32. Easterly, William & Levine, Ross, 2003. "Tropics, germs, and crops: how endowments influence economic development," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 3-39, January.
    33. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    34. Egger, Peter & Larch, Mario, 2011. "An assessment of the Europe agreements' effects on bilateral trade, GDP, and welfare," European Economic Review, Elsevier, vol. 55(2), pages 263-279, February.
    35. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    36. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    37. Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1430-1452, December.
    38. Toya, Hideki & Skidmore, Mark, 2007. "Economic development and the impacts of natural disasters," Economics Letters, Elsevier, vol. 94(1), pages 20-25, January.
    39. Greenaway, David & Morgan, Wyn & Wright, Peter, 2002. "Trade liberalisation and growth in developing countries," Journal of Development Economics, Elsevier, vol. 67(1), pages 229-244, February.
    40. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
    41. Lederman, Daniel & Maloney, William F., 2003. "Trade structure and growth," Policy Research Working Paper Series 3025, The World Bank.
    42. Noguer, Marta & Siscart, Marc, 2005. "Trade raises income: a precise and robust result," Journal of International Economics, Elsevier, vol. 65(2), pages 447-460, March.
    43. Carrere, Celine, 2006. "Revisiting the effects of regional trade agreements on trade flows with proper specification of the gravity model," European Economic Review, Elsevier, vol. 50(2), pages 223-247, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Matthew Ranson & Lisa Tarquinio & Audrey Lew, 2016. "Modeling the Impact of Climate Change on Extreme Weather Losses," NCEE Working Paper Series 201602, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised May 2016.
    2. Florian Dorn & Clemens Fuest & Niklas Potrafke, 2017. "Globalisation and Income Inequality Revisited," European Economy - Discussion Papers 2015 - 056, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Lazzaroni, Sara & van Bergeijk, Peter A.G., 2014. "Natural disasters' impact, factors of resilience and development: A meta-analysis of the macroeconomic literature," Ecological Economics, Elsevier, vol. 107(C), pages 333-346.
    4. repec:spr:envpol:v:20:y:2018:i:1:d:10.1007_s10018-016-0180-3 is not listed on IDEAS
    5. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 829-842.
    6. Gabriel Felbermayr, 2016. "Economic Analysis of TTIP," ifo Working Paper Series 215, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    7. Felbermayr, Gabriel & Gröschl, Jasmin, 2014. "Naturally negative: The growth effects of natural disasters," Journal of Development Economics, Elsevier, vol. 111(C), pages 92-106.
    8. Gabriel Felbermayr & Jasmin Katrin Gröschl, 2013. "Natürlich negativ: Der Wachstumseffekt von Naturkatastrophen," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 66(19), pages 16-22, October.
    9. Gabriel Felbermayr & Mario Larch, 2014. "Transatlantic Free Trade: Questions and Answers from the Vantage Point of Trade Theory," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(4), pages 03-17, January.
    10. Niklas Potrafke, 2015. "The Evidence on Globalisation," The World Economy, Wiley Blackwell, vol. 38(3), pages 509-552, March.
    11. Peter Eppinger & Niklas Potrafke, 2016. "Did Globalisation Influence Credit Market Deregulation?," The World Economy, Wiley Blackwell, vol. 39(3), pages 426-443, March.
    12. Mitrut, Andreea & Wolff, François-Charles, 2014. "Remittances after natural disasters: Evidence from the 2004 Indian tsunami," Working Papers in Economics 604, University of Gothenburg, Department of Economics.
    13. Chowdhury, Mohammad Tarequl Hasan & Bhattacharya, Prasad Sankar & Mallick, Debdulal & Ulubaşoğlu, Mehmet Ali, 2016. "Exchange rate regimes and fiscal discipline: The role of trade openness," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 106-128.
    14. Brambilla, Irene & Porto, Guido G., 2016. "High-income export destinations, quality and wages," Journal of International Economics, Elsevier, vol. 98(C), pages 21-35.
    15. Lixin Tang, 2014. "Top Income Inequality, Aggregate Saving and the Gains from Trade," 2014 Papers pta581, Job Market Papers.
    16. Lu, Lina, 2017. "Simultaneous Spatial Panel Data Models with Common Shocks," Risk and Policy Analysis Unit Working Paper RPA 17-3, Federal Reserve Bank of Boston.

    More about this item

    Keywords

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

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:58:y:2013:i:c:p:18-30. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eer .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.