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Elasticity Optimism

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  • International Monetary Fund

Abstract

In most macroeconomic models, the substitutability between domestic and foreign goods is calibrated using aggregated data. This imposes homogeneous elasticities across goods, and the calibration is only valid under this assumption. If elasticities are heterogeneous, the aggregate substitutability is a weighted average of good-specific elasticities, which in general cannot be inferred from aggregated data. We identify structurally the substitutability in US goods using multilateral trade data. We impose homogeneity, and find an aggregate elasticity similar in value to conventional macroeconomic estimates. It is more than twice larger with sectoral heterogeneity. We discuss the implications in various areas of international economics.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/279.

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Length: 45
Date of creation: 01 Dec 2009
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Handle: RePEc:imf:imfwpa:09/279

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Keywords: Consumer goods; Data analysis; Economic models; elasticity of substitution; equation; calibration; measurement error; import prices; correlation; statistics; aggregate imports; international trade; terms of trade; equations; trade costs; trade data; standard errors; domestic price; import price; domestic economy; aggregate consumption; export markets; domestic goods; domestic prices; predictions; bilateral trade; exporting countries; econometrics; probability; trade flows; multilateral trade; transport costs; arithmetic; domestic price index; product differentiation; algebra; standard error; standard deviation; export market; domestic production; free entry; survey; correlations; covariance; sensitivity analysis; imported goods; parameter value; price of imports; impact of trade; import demand; time series; logarithms; open economy; commodity trade; pattern of trade; sample size; calibrations; closed economy; tariff changes; constant elasticity of substitution; empirical model; prediction; standard deviations; volume of trade; political economy; probability density; foreign trade; export price; counting; confidence interval; regression analysis; probability density function; bilateral trade flows; outliers; estimation procedure; world trade; cumulative distribution function; cross-country variation; sensitivity analyses; metal products; net exports; domestic consumption; computations; significance levels; instrumental variable; domestic market; trade restrictions; aggregate shocks; trade liberalizations;

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