Bilateral Trade and Shocks in Political Relations: Evidence from China and Some of its Major Trading Partners, 1990–2012
43 Pages Posted: 18 Dec 2014
Date Written: December 16, 2014
An extensive number of studies investigate the effects of political relations on trade by estimating a gravity model using annual (or quarterly) data. We argue that the use of low-frequency data introduces an aggregation bias because the cycle of moderate political shocks is much shorter (measured in weeks). Using monthly data from 1990 through 2012 for China, we estimate a model of political relations and conclude that political shocks are short-lived. Narrative evidence from two case studies confirms that transitory nature of these shocks. A VAR model shows that although political shocks influence trade, the effects vanish within two months.
Keywords: Political Relations, Bilateral trade, China
JEL Classification: F14, F51
Suggested Citation: Suggested Citation