Trade and Income in the Long Run: Are There Really Gains, and Are They Widely Shared?
IMF Working Papers, November 7, 2017
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Bibliographic details
- Authors: Diego A. Cerdeiro, Andras Komaromi
- Published: November 7, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484324851.001
Research question and identification
- Main question: Do cross-country correlations between trade and income, and between trade and inequality, reflect causal relationships?
- Identification strategy: Adopt the Frankel and Romer (1999) identification strategy; exploit countries' exogenous geographic characteristics as an instrument for trade.
- Instrument validity: Carefully analyze the validity of the geography-based instrument in light of previous concerns in the literature (e.g. Rodriguez and Rodrik, 2001; Rodrik, Subramanian and Trebbi, 2004); confirm that IV estimates are not driven by other direct or indirect effects of geography through non-trade channels.
Key empirical findings
- Trade’s impact on real income:
- Cross-country IV estimates for trade's impact on real income are consistently positive and significant over time.
- Trade’s impact on inequality:
- No statistical evidence that more trade increases aggregate measures of income inequality.
- Correlations in cross-section:
- Strong positive correlation between trade and income.
- Negative relationship between trade and inequality.
Methodological notes and robustness
- Estimation approach: Instrumental variables (IV) estimation using geography-based instruments derived from exogenous country geographic characteristics.
- Robustness emphasis: Explicitly heed and address prior literature concerns about geography-based instruments to rule out confounding non-trade channels.
Policy-relevant implications
- Expansion of trade is causally associated with higher real income at the country level based on IV estimates.
- Aggregate measures of income inequality do not show evidence of widening as a result of increased trade in these cross-country IV estimates.
- Policy focus should consider trade as a driver of higher real income while recognizing that aggregate inequality effects are not supported by the IV evidence presented.
Diego A. Cerdeiro and Andras Komaromi, November 7, 2017 — IMF Working Paper