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Trade and growth: A gravity approach
Author(s) -
Gervais Antoine
Publication year - 2015
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-2013.272
Subject(s) - openness to experience , romer , benchmark (surveying) , bilateral trade , economics , gravity equation , econometrics , gravity model of trade , instrumental variable , estimation , identification (biology) , international economics , geography , geodesy , psychology , social psychology , botany , management , archaeology , china , biology
The impact of international trade, or “openness,” on economic growth is difficult to quantify because of reverse causality. In this article, I use recent advances in gravity equation estimation to generate a geography‐based instrument for openness à la Frankel and Romer (1999). In contrast with the benchmark, the new instrument is constructed using consistent and unbiased estimates of the impact of geography on bilateral trade. As a result, the instrument provides stronger identification of the impact of trade on income and increases the efficiency of the two‐stage least square estimation. An important advantage of the corrected procedure over the benchmark is that the estimated effect of trade on income remains large, positive, and statistically significant even after controlling for regional indicators and endogenous institutional quality.