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Elasticity optimism

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Author Info
Jean Imbs (HEC, Lausanne - Department of Economics, Center for Economic Research - CEPR, Swiss Finance Institut - Swiss Finance Institut)
Isabelle Méjean (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

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Abstract

Estimates of the elasticity of substitution between domestic and foreign varieties are small in macroeconomic data, and substantially larger in disaggregated studies. This may be an artifact of heterogeneity. We use disaggregated multilateral trade data to structurally identify elasticities of substitution in US goods. We spell out a partial equilibrium model to aggregate them adequately at the country level. We compare aggregate elasticities that impose equality across sectors, to estimates allowing for heterogeneity. The former are similar in value to conventional macroeconomic estimates; but they are more than twice larger -up to 7- with heterogeneity. The parameter is central to calibrated models in most of international economics. We discuss the difference our corrected estimate makes in various areas of international economics, including the dynamics of external balances, the international transmission of shocks, international portfolio choice and optimal monetary policy.

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Paper provided by HAL in its series Working Papers with number hal-00362403_v1.

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Date of creation: Feb 2009
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Related research
Keywords: Trade Elasticities; Aggregation; Calibration; Global Imbalances; International Transmission; International Portfolio; Monetary Policy.;

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bruce A. Blonigen & Anson Soderbery, 2009. "Measuring the Benefits of Product Variety with an Accurate Variety Set," NBER Working Papers 14956, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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