Does Trade Cause Capital to Flow? Evidence from Historical Rainfalls
NBER Working Paper No. 16034
We use a historical quasi-experiment to estimate the causal effect of trade on capital flows. We argue that fluctuations in regional rainfall within the Ottoman Empire capture the exogenous variation in exports from the Empire to Germany, France, and the U.K., during 1859–1913. Our identification is based on the following historical facts: First, only surplus production was allowed to be exported in the Ottoman Empire (provisionistic policy). Second, different products grew in different regions that were subject to variation in rainfall. Third, Germany, France, and the U.K. imported these different products. When a given region of the Empire gets more rainfall than others, the resulting surplus production is exported to countries with higher ex-ante export shares for those products, and this leads to higher foreign investment by those countries in the Ottoman Empire. Our findings support theories predicting complementarity between trade and finance, where causality runs from trade to capital flows.
Document Object Identifier (DOI): 10.3386/w16034
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