A further investigation of the link between trade and income

Jan Ivar Ondrich, J. David Richardson, Shuo Zhang

Research output: Contribution to journalArticle

Abstract

The link between openness and income has received increasing attention as countries try to justify their trade-promoting policies. Recent work of Frankel & Romer (1999) examines the effect of trade on income. We explore how the estimates of the trade effect change when we relax their assumption of heteroscedasticity in the bilateral trade equation they use to construct the instrument for the IV regression. Because the instrument is constructed through a nonlinear transformation, unequal disturbance variances imply inconsistency and not just inefficiency of the Frankel–Romer estimates. We find a smaller positive effect of trade than that found by Frankel & Romer.

Original languageEnglish (US)
Pages (from-to)19-36
Number of pages18
JournalInternational Economic Journal
Volume20
Issue number1
DOIs
StatePublished - Jan 1 2006

Keywords

  • Heteroscedasticity
  • Income
  • Instrumental variable
  • Trade

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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