Working Paper: NBER ID: w5732
Authors: Jeffrey A. Frankel; David Romer; Teresa Cyrus
Abstract: Estimates of growth equations have found a role for openness, particularly in explaining rapid growth among East Asian countries. But major concerns of simultaneous causality between growth and trade have been expressed. This study aims to deal with the endogeneity of trade by using as instrumental variables the exogenous determinants from the gravity model of bilateral trade, such as proximity to trading partners. We find that the effect of openness on growth is even stronger when we correct for the endogeneity of openness than in standard OLS estimates. We conclude with estimates of how much has been contributed to East Asian growth both by the exogenous or geographical component of openness and by the residual or policy component.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade openness (F43) | economic growth (O49) |
| geographical proximity to trading partners (F10) | trade openness (F43) |
| trade openness (F43) | per capita income (D31) |
| geographical component of openness (R12) | economic growth (O49) |
| policy component of openness (F68) | economic growth (O49) |