Working Paper: CEPR ID: DP4418
Authors: Marion Jansen; Hildegunn Kyvik Nords
Abstract: This Paper analyses to which extent domestic institutions affect trade flows. We use two complementary approaches, one focusing on the size of total trade flows and one focusing on bilateral trade patterns (gravity equation). We also control for two other domestic policy variables: trade policy and domestic infrastructure. We find that the quality of institutions has a positive and significant impact on a country?s level of openness. Domestic tariffs have no statistically significant impact alone, but do affect total trade flows when combined with good institutions. Domestic institutions also have a positive and significant impact on bilateral trade flows, but the parameter of our institution variables is reduced by almost a half and may turn insignificant when the quality of domestic infrastructure is included in the regression.
Keywords: bilateral trade flows; gravity model; institutional quality; openness
JEL Codes: F10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quality of institutions (O43) | Openness to trade (F10) |
| Domestic tariffs + Quality of institutions (F13) | Total trade flows (F10) |
| Quality of institutions (O43) | Bilateral trade flows (F10) |
| Domestic infrastructure (H54) | Significance of institutional quality in regression (C20) |
| Quality of institutions + Tariff reductions (F13) | Trade flows (F10) |