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International Trade without CES: Estimating Translog Gravity

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  • Novy, Dennis

    (University of Warwick)

Abstract

This paper derives a micro-founded gravity equation based on a translog demand system that allows for flexible substitution patterns across goods. In contrast to the standard CES-based gravity equation, translog gravity generates an endogenous trade cost elasticity. 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 empirical evidence that is in many ways consistent with its predictions.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/research/wpfeed/101.2012_novy.pdf
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Bibliographic Info

Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 101.

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Date of creation: 2012
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Handle: RePEc:cge:wacage:101

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Keywords: Translog; Gravity; Trade Costs; Distance; Trade Cost Elasticity; Import Share;

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References

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Cited by:
  1. Keith Head & Thierry Mayer, 2013. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Working Papers 2013-27, CEPII research center.
  2. Head, Keith & Mayer, Thierry, 2013. "What separates us? Sources of resistance to globalization," CEPR Discussion Papers 9614, C.E.P.R. Discussion Papers.
  3. Monika Mr?zov? & J. Peter Neary, 2014. "Together at Last: Trade Costs, Demand Structure, and Welfare," American Economic Review, American Economic Association, vol. 104(5), pages 298-303, May.
  4. 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.
  5. Meissner, Christopher M., 2014. "Growth from Globalization? A View from the Very Long Run," Handbook of Economic Growth, in: Handbook of Economic Growth, edition 1, volume 2, chapter 8, pages 1033-1069 Elsevier.
  6. 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 124530, Agricultural and Applied Economics Association.
  7. 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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