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International Trade without CES: Estimating Translog Gravity

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  • Novy, Dennis

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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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9125.

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Date of creation: Sep 2012
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Handle: RePEc:cpr:ceprdp:9125

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Related research

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

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References

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Citations

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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. Keith Head & Thierry Mayer, 2013. "What Separates Us? Sources of Resistance to Globalization," Working Papers 2013-26, CEPII research center.
  3. 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.
  4. 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.
  5. 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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