Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26291
Authors: 
Heinemeyer, Hans Christian
Schulze, Max-Stephan
Wolf, Nikolaus
Year of Publication: 
2008
Series/Report no.: 
CESifo working paper 2246
Abstract: 
A large literature on border effects in the wake of McCallum (1995) documents the massive impact of borders on trade. However, all these studies suffer from an identification problem. Border effects are usually identified from cross-sectional variation alone. We do not know how trade would change in response to a change in borders - the treatment effect of borders on trade - simply because trade flows across future borders are typically not documented. Nor can we rule out that there is reverse causation : that borders run along pre-existing trade patterns rather than shape trade flows. We exploit a natural experiment from history to explore this issue: the many dramatic border changes that were imposed and codified by the peace treaties in 1919 across Europe. We follow Ritschl and Wolf (2008) and implement Ashenfelter's difference-in-difference estimator in levels on a large, new data set on sub-national trade flows. This allows us to trace the effects of changing borders over time and produces two key results: first, new borders have a large effect on trade. However second, the treatment effects of borders tend to be significantly smaller than the pure cross-sectional effects. This is so, because most of the 1919 border changes followed a pattern of trade relations across the region that was clearly visible already before 1914. Borders shape trade, and trade shapes borders.
Subjects: 
border effects
treatment effects
European history
JEL: 
F12
F15
N13
N14
Document Type: 
Working Paper

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