Natural Disasters and the Effect of Trade on Income: A New Panel IV Approach

Gabriel Felbermayr, Jasmin Katrin Gröschl and Gabriel J. Felbermayr
Authors registered in the RePEc Author Service: Jasmin Groeschl and Gabriel J Felbermayr

No 3541, CESifo Working Paper Series from CESifo

Abstract: Does trade openness cause higher GDP per capita? Since the seminal instrumental variables (IV) estimates of Frankel and Romer [F&R](1999) important doubts have surfaced. Is the correlation spurious and driven by omitted geographical and institutional variables? In this paper, we generalize F&R’s geography-based empirical strategy to a panel setting. We observe that natural disasters affect bilateral trade, and that this effect is conditioned by geographical variables such as distance to financial centers or area. This allows us to use interactions between geography and the incidence of disasters at the bilateral level to construct an instrument for multilateral openness that varies across countries and time. The instrument can be used in panel setups where it is possible to fully control for geographical and historical determinants of countries’ performances as well as for the direct effect of disasters. We find that the elasticity of income with respect to openness is about 0.69, but that substantial heterogeneity exists across country samples.

Keywords: per capita income; openness; natural disasters; instrumental variable estimation; panel econometrics (search for similar items in EconPapers)
JEL-codes: C23 C26 F15 F43 O40 Q54 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Natural disasters and the effect of trade on income: A new panel IV approach (2013)
Working Paper: Natural disasters and the effect of trade on income: A new panel IV approach (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_3541

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