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International Trade and Monopolistic Competition without CES: Estimating Translog Gravity

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  • Novy, Dennis

    (Department of Economics, University of Warwick and CESifo)

Abstract

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and rich substitution patterns across goods. In contrast to standard CES-based gravity equations, 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 strong empirical support in its favor. In an application to the currency union effect, I find that a currency union is only associated with substantially higher bilateral trade if the exporting country provides a small share of the destination country's imports. For other pairs, the currency union effect is modest or indistinguishable from zero. I test the translog gravity equation and find strong empirical support in it's favour.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2010/twerp_929.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 929.

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Date of creation: 2010
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Handle: RePEc:wrk:warwec:929

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Related research

Keywords: Translog ; Gravity ; Trade Costs; Distance; Trade Cost Elasticy JEL Codes: F11 ; F12 ; F15;

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Cited by:
  1. Beatriz de Blas & Katheryn Niles Russ, 2010. "Teams of rivals: endogenous markups in a Ricardian world," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 67, Federal Reserve Bank of Dallas.
  2. Oxana Babecká Kucharčuková & Jan Babecký & Martin Raiser, 2012. "Gravity Approach for Modelling International Trade in South-Eastern Europe and the Commonwealth of Independent States: The Role of Geography, Policy and Institutions," Open Economies Review, Springer, Springer, vol. 23(2), pages 277-301, April.
  3. Treb Allen, 2012. "Information Frictions in Trade," 2012 Meeting Papers, Society for Economic Dynamics 125, Society for Economic Dynamics.
  4. Oxana Babecka Kucharcukova & Jan Babecky & Martin Raiser, 2010. "A Gravity Approach to Modelling International Trade in South-Eastern Europe and the Commonwealth of Independent States: The Role of Geography, Policy and Institutions," Working Papers, Czech National Bank, Research Department 2010/04, Czech National Bank, Research Department.
  5. Danny McGowan & Chris Milner, . "Trade Costs and Trade Composition," Discussion Papers 11/11, University of Nottingham, GEP.
  6. James E. Anderson, 2011. "The Gravity Model," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 3(1), pages 133-160, 09.
  7. Beatriz de Blas & Katheryn Russ, 2010. "Understanding Markups in the Open Economy under Bertrand Competition," NBER Working Papers 16587, National Bureau of Economic Research, Inc.
  8. Herwartz, Helmut & Weber, Henning, 2013. "The role of cross-sectional heterogeneity for magnitude and timing of the euro's trade effect," Journal of International Money and Finance, Elsevier, Elsevier, vol. 37(C), pages 48-74.
  9. Murat Genç & David Law, 2014. "A Gravity Model of Barriers to Trade in New Zealand," Treasury Working Paper Series 14/05, New Zealand Treasury.

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