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International Trade without CES: Estimating Translog Gravity

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  • Dennis Novy

Abstract

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and substitution patterns across goods. In contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country’s imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find strong empirical support in its favor.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-04/cesifo1_wp3008rev.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3008.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3008

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Keywords: translog; gravity; trade costs; distance; trade cost elasticity;

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References

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Cited by:
  1. Xiong, Bo & Chen, Sixia, 2012. "Estimating Gravity Equation Models in the Presence of Sample Selection and Heteroskedasticity," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 124530, Agricultural and Applied Economics Association.
  2. Amit Khandelwal & Pablo Fajgelbaum, 2013. "Measuring the Unequal Gains From Trade," 2013 Meeting Papers, Society for Economic Dynamics 456, Society for Economic Dynamics.
  3. Meissner, Christopher M., 2014. "Growth from Globalization? A View from the Very Long Run," Handbook of Economic Growth, Elsevier, in: Handbook of Economic Growth, edition 1, volume 2, chapter 8, pages 1033-1069 Elsevier.
  4. Keith Head & Thierry Mayer, 2013. "Gravity Equations: Workhorse, Toolkit, and Cookbook," Sciences Po publications 2013-02, Sciences Po.
  5. Peter Neary & Monika Mrazova, 2014. "Together at Last: Trade Costs, Demand Structure, and Welfare," Economics Series Working Papers 694, University of Oxford, Department of Economics.
  6. Arvis, Jean-François, 2013. "Integrating gravity: the role of scale invariance in gravity models of spatial interactions and trade," Policy Research Working Paper Series 6347, The World Bank.
  7. Marc Melitz & Stephen Redding, . "New Trade Models, New Welfare Implications," Working Paper 65406, Harvard University OpenScholar.
  8. Keith Head & Thierry Mayer, 2013. "What separates us? Sources of resistance to globalization," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 46(4), pages 1196-1231, November.
  9. World Bank, 2014. "Trading Up to High Income : Turkey Country Economic Memorandum," World Bank Other Operational Studies 19320, The World Bank.
  10. Peter Neary & Monika Mrazova, 2013. "Not so demanding: Preference structure, firm behavior, and welfare," Economics Series Working Papers 691, University of Oxford, Department of Economics.

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