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

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Listed author(s):
  • 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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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
DOI: 10.1016/j.euroecorev.2012.11.008
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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

Other versions of this item:

Find related papers by 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

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Cited by:

  1. 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.
  2. Brambilla, Irene & Porto, Guido G., 2016. "High-income export destinations, quality and wages," Journal of International Economics, Elsevier, vol. 98(C), pages 21-35.
  3. Peter Eppinger & Niklas Potrafke, 2016. "Did Globalisation Influence Credit Market Deregulation?," The World Economy, Wiley Blackwell, vol. 39(3), pages 426-443, 03.
  4. 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.
  5. Gabriel Felbermayr, 2016. "Economic Analysis of TTIP," ifo Working Paper Series Ifo Working Paper No. 215, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  6. Potrafke, Niklas, 2013. "Globalization and labor market institutions: International empirical evidence," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 829-842.
  7. 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.
  8. Felbermayr, Gabriel & Gröschl, Jasmin, 2014. "Naturally negative: The growth effects of natural disasters," Journal of Development Economics, Elsevier, vol. 111(C), pages 92-106.
  9. Gabriel Felbermayr & Jasmin 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.
  10. 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, 01.
  11. Niklas Potrafke, 2015. "The Evidence on Globalisation," The World Economy, Wiley Blackwell, vol. 38(3), pages 509-552, 03.
  12. Lixin Tang, 2014. "Top Income Inequality, Aggregate Saving and the Gains from Trade," 2014 Papers pta581, Job Market Papers.
  13. 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.

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