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

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  • Parlow, Anton

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.

Suggested Citation

  • Parlow, Anton, 2011. "Does trade promote peace? squared: a gravity equation in a rectangular panel world," MPRA Paper 36430, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:36430
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    References listed on IDEAS

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    More about this item

    Keywords

    Trade; Conflicts; GDP; Gravity model;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • N40 - Economic History - - Government, War, Law, International Relations, and Regulation - - - General, International, or Comparative

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