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The Frankel\u2010Romer approach has gained widespread popularity as a method to generate instruments for trade and many other outcome variables from estimated bilateral relationships. In this paper, we show analytically and empirically that the Frankel\u2013Romer instrument gives inconsistent estimates for the effect of trade on income when fitted values for zero and missing bilateral shares are omitted from the instrument. This leads to a violation of the exclusion restriction because the instrument captures the endogenous variation in the observed probability that countries engage in bilateral trade, as reflected in the number of observed trading partners. This violation disappears when predicted bilateral shares for all observed and unobserved bilateral trade relationships are included in the instrument for trade openness.<\/jats:p>","DOI":"10.1002\/jae.2815","type":"journal-article","created":{"date-parts":[[2021,4,21]],"date-time":"2021-04-21T21:44:45Z","timestamp":1619041485000},"page":"437-452","update-policy":"https:\/\/doi.org\/10.1002\/crossmark_policy","source":"Crossref","is-referenced-by-count":4,"title":["When are instruments generated from geographic characteristics in bilateral relationships invalid?"],"prefix":"10.1002","volume":"36","author":[{"given":"Sabine","family":"Deij","sequence":"first","affiliation":[{"name":"Melbourne School of Population and Global Health University of Melbourne  Carlton Victoria Australia"}],"role":[{"role":"author","vocabulary":"crossref"}]},{"given":"Jakob B.","family":"Madsen","sequence":"additional","affiliation":[{"name":"Department of Economics University of Western Australia  Perth Western Australia Australia"}],"role":[{"role":"author","vocabulary":"crossref"}]},{"given":"Laura","family":"Puzzello","sequence":"additional","affiliation":[{"name":"Department of Economics and SoDa Laboratories, Monash Business School Monash University  Melbourne Victoria Australia"}],"role":[{"role":"author","vocabulary":"crossref"}]}],"member":"311","published-online":{"date-parts":[[2021,5,10]]},"reference":[{"key":"e_1_2_9_2_1","doi-asserted-by":"publisher","DOI":"10.1257\/aer.98.3.808"},{"key":"e_1_2_9_3_1","doi-asserted-by":"publisher","DOI":"10.1007\/s10887-016-9127-6"},{"key":"e_1_2_9_4_1","doi-asserted-by":"publisher","DOI":"10.1257\/aer.90.5.1276"},{"key":"e_1_2_9_5_1","doi-asserted-by":"publisher","DOI":"10.1007\/s10887-011-9060-7"},{"key":"e_1_2_9_6_1","series-title":"School of Economics Discussion Papers No. 1709","volume-title":"Industry volatility and international trade","author":"Ardelean A.","year":"2017"},{"key":"e_1_2_9_7_1","doi-asserted-by":"publisher","DOI":"10.1111\/ecoj.12450"},{"key":"e_1_2_9_8_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jinteco.2017.03.004"},{"key":"e_1_2_9_9_1","volume-title":"NBER Working Paper 27845","author":"Borusyak K.","year":"2020"},{"key":"e_1_2_9_10_1","doi-asserted-by":"publisher","DOI":"10.1353\/eca.2004.0002"},{"key":"e_1_2_9_11_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.worlddev.2016.08.012"},{"key":"e_1_2_9_12_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jinteco.2015.09.004"},{"key":"e_1_2_9_13_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jeem.2007.08.004"},{"key":"e_1_2_9_14_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jimonfin.2007.10.004"},{"key":"e_1_2_9_15_1","doi-asserted-by":"publisher","DOI":"10.1162\/rest.91.3.558"},{"key":"e_1_2_9_16_1","doi-asserted-by":"publisher","DOI":"10.1162\/003355302753399436"},{"key":"e_1_2_9_17_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jfineco.2006.11.004"},{"key":"e_1_2_9_18_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jdeveco.2015.10.006"},{"key":"e_1_2_9_19_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jdeveco.2015.12.001"},{"key":"e_1_2_9_20_1","doi-asserted-by":"publisher","DOI":"10.1016\/S0304-3932(02)00206-4"},{"key":"e_1_2_9_21_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jinteco.2005.01.003"},{"key":"e_1_2_9_22_1","doi-asserted-by":"publisher","DOI":"10.1111\/twec.12282"},{"key":"e_1_2_9_23_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.euroecorev.2012.11.008"},{"key":"e_1_2_9_24_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.econlet.2010.01.017"},{"key":"e_1_2_9_25_1","doi-asserted-by":"crossref","unstructured":"Feyrer J.(2009).Distance trade and income\u2014The 1967 to 1975 closing of the suez canal as a natural experiment. 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