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

Gabriel Felbermayr and Jasmin Gröschl
Authors registered in the RePEc Author Service: Jasmin Groeschl

Munich Reprints in Economics from University of Munich, Department of Economics

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.

Date: 2013
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Citations: View citations in EconPapers (72)

Published in European Economic Review 58(2013): pp. 18-30

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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 (2011)
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