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International trade without CES: Estimating translog gravity

  • Novy, Dennis

This paper derives a micro-founded gravity equation based on a translog demand system that allows for flexible substitution patterns across goods. In contrast to the standard CES-based gravity equation, translog gravity generates an endogenous trade cost elasticity. 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 empirical evidence that is in many ways consistent with its predictions.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022199612001584
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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 2 ()
Pages: 271-282

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Handle: RePEc:eee:inecon:v:89:y:2013:i:2:p:271-282
DOI: 10.1016/j.jinteco.2012.08.010
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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