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

Felbermayr, Gabriel and Gröschl, Jasmin (2013): Natural disasters and the effect of trade on income: A new panel IV approach. In: European Economic Review, Vol. 58: pp. 18-30

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.

• Item Type: Journal article
• Faculties: Economics; Economics > Chairs > CESifo-Professorship for International Trade
• Subjects: 300 Social sciences > 330 Economics
• Language: English