Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244536 
Year of Publication: 
2018
Series/Report no.: 
Working Paper No. 4/2018
Publisher: 
Örebro University School of Business, Örebro
Abstract: 
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.
Subjects: 
Trade
economic growth
instrument variables
JEL: 
F43
Document Type: 
Working Paper

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