Effects of geopolitical risks on trade flows: evidence from the gravity model

Abstract

Using a classical gravity model, this paper examines the effects of geopolitical risks on the trade flows, among 164 developing and developed countries, for the period of 1985-2013. For this purpose, we use the new index of geopolitical risks (GPR index). To the best of our knowledge, this is the first paper in the literature that considers the new GPR index in a gravity model. The paper implements the fixed-effects (FE), the random-effects (RE), the Hausman-Taylor (HT), and the Poisson Pseudo-maximum Likelihood estimations. The findings indicate that geopolitical risks negatively affect the trade flows. The paper also discusses the potential policy implications.