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Frankel and Romer revisited

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Frankel and Romer (1999) proposed an instrument variable for trade intensity to robustly assess the causal impact of international trade on standards of living. The instrument is based on OLS estimates of the gravity equation and has been widely used in the literature. In this note I show that the instrument is unrelated to income in the mid-2000s. Re-estimating the gravity equation using PPML, I show that the resulting instrument is strongly related to GDP per capita, but weakly correlated with trade, suggesting that what is captured may be a direct link between geography and income.

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  • Kyvik Nordås, Hildegunn, 2018. "Frankel and Romer revisited," Working Papers 2018:4, Örebro University, School of Business.
    • Handle: RePEc:hhs:oruesi:2018_004
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    1. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1999. "Geography and Economic Development," International Regional Science Review, , vol. 22(2), pages 179-232, August.
    2. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    3. John Luke Gallup & Jeffrey D. Sachs & Andrew Mellinger, 1999. "Geography and Economic Development," CID Working Papers 1, Center for International Development at Harvard University.
    4. John Luke Gallup & Jeffrey D. Sachs & Andrew Mellinger, 1999. "Geography and Economic Development," CID Working Papers 01A, Center for International Development at Harvard University.
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    6. Gallup, J.L. & Sachs, J.D. & Mullinger, A., 1999. "Geography and Economic Development," Papers 1, Chicago - Graduate School of Business.
    7. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    8. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    9. James R. Markusen & Anthony J. Venables, 2021. "Multinational firms and the new trade theory," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 3, pages 47-67, World Scientific Publishing Co. Pte. Ltd..
    10. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
    11. repec:hal:spmain:info:hdl:2441/6apm7lruv088iagm4rv2c33jtg is not listed on IDEAS
    12. Gallup, John & Sachs, Jeffrey, 1999. "Geography and Economic Development," Harvard Institute for International Development (HIID) Papers 294434, Harvard University, Kennedy School of Government.
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    More about this item

    Keywords

    Trade; economic growth; instrument variables;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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