DP4418 Institutions, Trade Policy and Trade Flows

Author(s): Marion Jansen, Hildegunn Kyvik Nordås
Publication Date: June 2004
Keyword(s): bilateral trade flows, gravity model, institutional quality, openness
JEL(s): F10
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4418

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.