Estimating Import Demand Function in Developing Countries: A Structural Econometric Approach with Applications to India and Sri Lanka
AbstractDue to the unavailability of time series data on domestic market clearing price of imports, the estimation ofnotional price and income elasticities of aggregate import demand remains a daunting task for a large number of developing countries. This paper develops a structural econometric model of a two goods representative agent economy that incorporates a binding foreign exchange constraint at the administered prices of imports. A theoretically consistent parameterization of the ‘virtual relative price’ of imports circumvents the data problem, and thus enables the estimation of income and price responses by cointegration approach. The price and income elasticity estimates for India and Sri Lanka, in contrast to the extant literature, have correct signs, high statistical significance, and plausible magnitudes.
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Bibliographic InfoPaper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2008-10.
Length: 33 pages
Date of creation: Jul 2008
Date of revision:
Import Demand; Foreign Exchange Rationing; Virtual price; India; Sri Lanka; Cointegration;
Find related papers by JEL classification:
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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- Devarajan, Shantayanan & Go, Delfin S. & Hongyi Li, 1999. "Quantifying the fiscal effects of trade reform," Policy Research Working Paper Series 2162, The World Bank.
- Allan W. Gregory & Alfred A. Haug & Nicoletta Lomuto, 2004. "Mixed signals among tests for cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 89-98.
- Rashid, Abdul & Razzaq, Tayyaba, 2010. "Estimating Import-Demand Function in ARDL Framework: The Case of Pakistan," MPRA Paper 23702, University Library of Munich, Germany.
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