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Trade adjustment in the European Union - a structural estimation approach

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  • Corbo, Vesna
  • Osbat, Chiara

Abstract

We estimate the elasticity of substitution of a country’s imports, and that of its exports on the world market, for EU countries using sector level trade data. We present a new empirical strategy based on the identification scheme by Feenstra (1994), which enables the estimation of elasticities from data on exports. Moreover, our use of bootstrap methods allows us to obtain better elasticity measures, and to better characterize their accuracy. Our results show much heterogeneity in the estimates of the elasticity of substitution across industrial sectors. This, in turn, points to heterogeneity across countries, due to different production and trade structures. We obtain aggregate elasticities for the EU27 countries, with a mean of 3.5 for imports and 4.0 for exports, bringing us closer to traditional estimates and bridging the gap between the newer micro data estimates and the more traditional estimates found in the macroeconomic literature. JEL Classification: C23, F14, F47

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1535.

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Date of creation: Apr 2013
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Handle: RePEc:ecb:ecbwps:20131535

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Related research

Keywords: Aggregation; calibration of macroeconomic models; Elasticity of Substitution; heterogeneity;

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  1. Feenstra & R.C., 1990. "New Goods and Index Members: U.S. Import Prices," Papers 371, California Davis - Institute of Governmental Affairs.
  2. Jean Imbs & Isabelle Mejean, 2008. "Elasticity Optimism," EIEF Working Papers Series 0805, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2008.
  3. Justin Pierce & Peter Schott, 2009. "Concording U.S. Harmonized System Categories Over Time," Working Papers 09-11, Center for Economic Studies, U.S. Census Bureau.
  4. Mohler, Lukas & Seitz, Michael, 2010. "The Gains from Variety in the European Union," Discussion Papers in Economics 11477, University of Munich, Department of Economics.
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