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Aggregation Problems in Estimates of Armington Elasticities and Pass-Through Effects

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  • Jorge Chami Batista

    (UFRJ)

  • Nelson Isaac Abrahão Junior

    (FGV)

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    Abstract

    This article examines the level of aggregation problem for which Armington price elasticity of substitution and pass-through effects are usually estimated. On the basis of U.S. import data from 1995 to 2004 of wood products from Brazil and Mexico, it is argued that the usuallevels of aggregation used in the estimates for the elasticity of substitution are too high, since they tend to aggregate perfectly elastic products together with products whose elasticities vary from zero to any negative number. Analogously, the elasticity of relative prices with respect to the exchange rate, a measure of the pass-through effect, tends to be underestimated in the U.S. by the presence of homogeneous products whose prices are set in dollars and tend to equalize through arbitrage. Therefore, pricing-to-market estimates may be grossly overestimated for some industries in the U.S.

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    File URL: http://www.anpec.org.br/revista/vol6/vol6n2p329_355.pdf
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    Bibliographic Info

    Article provided by ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics] in its journal Economia.

    Volume (Year): 6 (2005)
    Issue (Month): 2 ()
    Pages: 329-355

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    Handle: RePEc:anp:econom:v:6:y:2005:i:2:p:329-355

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    Related research

    Keywords: Homogeneous Products; Differentiated Product; Pass-Through; Pricing-to-Market; Law of One Price;

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    References

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    1. Yang, Jiawen, 1998. "Pricing-to-market in U.S. imports and exports: A time series and cross-sessional study," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(4), pages 843-861.
    2. Goldberg, Pinelopi & Verboven, Frank, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," CEPR Discussion Papers 2926, C.E.P.R. Discussion Papers.
    3. Cezary A Kapuscinski & Peter G Warr, 1996. "Estimation of Armington Elasticities: An Application to the Philippines," Departmental Working Papers 1996-08, The Australian National University, Arndt-Corden Department of Economics.
    4. Thomas Hatzichronoglou, 1997. "Revision of the High-Technology Sector and Product Classification," OECD Science, Technology and Industry Working Papers 1997/2, OECD Publishing.
    5. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
    6. Hamilton, Robert W & Whalley, John, 1985. "Geographically Discriminatory Trade Arrangements," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 446-55, August.
    7. McDaniel, Christine A. & Balistreri, Edward J., 2002. "A Discussion on Armington Trade Substitution Elasticities," Working Papers 15856, United States International Trade Commission, Office of Economics.
    8. Clinton R. Shiells & Kenneth A. Reinert, 1993. "Armington Models and Terms-of-Trade Effects: Some Econometric Evidence for North America," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 299-316, May.
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    10. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December.
    11. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    12. Stephen Cecchetti & Nelson C. Mark & Robert Sonora, 1998. "Price Level Convergence Among United States Cities: Lessons for the European Central Bank," Working Papers 32, Oesterreichische Nationalbank (Austrian Central Bank).
    13. Richardson, J. David, 1978. "Some empirical evidence on commodity arbitrage and the law of one price," Journal of International Economics, Elsevier, vol. 8(2), pages 341-351, May.
    14. Reinert, Kenneth A. & Roland-Holst, David W., 1992. "Armington elasticities for United States manufacturing sectors," Journal of Policy Modeling, Elsevier, vol. 14(5), pages 631-639, October.
    15. Thursby, Marie C. & Johnson, Paul R. & Grennes, Thomas J., 1986. "The law of one price and the modelling of disaggregated trade flows," Economic Modelling, Elsevier, vol. 3(4), pages 293-302, October.
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