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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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    File URL: https://mpra.ub.uni-muenchen.de/36430/1/MPRA_paper_36430.pdf
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    References listed on IDEAS

    as
    1. Katherine Barbieri, 1996. "Economic Interdependence: A Path to Peace or a Source of Interstate Conflict?," Journal of Peace Research, Peace Research Institute Oslo, vol. 33(1), pages 29-49, February.
    2. Head, Keith & Mayer, Thierry & Ries, John, 2010. "The erosion of colonial trade linkages after independence," Journal of International Economics, Elsevier, vol. 81(1), pages 1-14, May.
    3. Solomon William Polachek, 1980. "Conflict and Trade," Journal of Conflict Resolution, Peace Science Society (International), vol. 24(1), pages 55-78, March.
    4. Philippe Martin & Thierry Mayer & Mathias Thoenig, 2008. "Make Trade Not War?," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 865-900.
    5. Katherine Barbieri & Gerald Schneider, 1999. "Globalization and Peace: Assessing New Directions in the Study of Trade and Conflict," Journal of Peace Research, Peace Research Institute Oslo, vol. 36(4), pages 387-404, July.
    6. Faten Ghosn & Glenn Palmer & Stuart A. Bremer, 2004. "The MID3 Data Set, 1993—2001: Procedures, Coding Rules, and Description," Conflict Management and Peace Science, Peace Science Society (International), vol. 21(2), pages 133-154, April.
    7. John R. Oneal & Bruce Russett, 1999. "Assessing the Liberal Peace with Alternative Specifications: Trade Still Reduces Conflict," Journal of Peace Research, Peace Research Institute Oslo, vol. 36(4), pages 423-442, July.
    8. Solomon W. Polachek & John Robst & Yuan-Ching Chang, 1999. "Liberalism and Interdependence: Extending the Trade-Conflict Model," Journal of Peace Research, Peace Research Institute Oslo, vol. 36(4), pages 405-422, July.
    9. Pemstein, Daniel & Meserve, Stephen A. & Melton, James, 2010. "Democratic Compromise: A Latent Variable Analysis of Ten Measures of Regime Type," Political Analysis, Cambridge University Press, vol. 18(04), pages 426-449, September.
    10. James D. Morrow, 1999. "How Could Trade Affect Conflict?," Journal of Peace Research, Peace Research Institute Oslo, vol. 36(4), pages 481-489, July.
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    12. repec:cup:apsrev:v:87:y:1993:i:02:p:408-420_10 is not listed on IDEAS
    13. Katherine Barbieri & Jack S. Levy, 1999. "Sleeping with the Enemy: The Impact of War on Trade," Journal of Peace Research, Peace Research Institute Oslo, vol. 36(4), pages 463-479, July.
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    More about this item

    Keywords

    Trade; Conflicts; GDP; Gravity model;

    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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