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Innovation and the trade elasticity

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  • Rubini, Loris

Abstract

The reaction of trade volumes to tariffs is far larger than what current models predict. One reason for this is that they abstract from endogenous productivity choices (“innovation”), which amplify this reaction. To show this, I develop a model of international trade with innovation, and calibrate it to Canada and United States before the Free Trade Agreement. Feeding in the tariff drops observed during the agreement, the increase in the trade volumes is within the empirical estimates. Without innovation, the change in trade volumes is too low, and similar to what current models without innovation have found.

Suggested Citation

  • Rubini, Loris, 2014. "Innovation and the trade elasticity," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 32-46.
  • Handle: RePEc:eee:moneco:v:66:y:2014:i:c:p:32-46
    DOI: 10.1016/j.jmoneco.2014.04.002
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    Cited by:

    1. Pedro Bento & Diego Restuccia, 2017. "Misallocation, Establishment Size, and Productivity," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 267-303, July.
    2. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    3. Loris Rubini, 2015. "Productivity and Trade Liberalizations in Canada," Economics Bulletin, AccessEcon, vol. 35(2), pages 1404-1422.
    4. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2018. "Managers and Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 256-282, July.
    5. Ranasinghe, Ashantha, 2014. "Impact of policy distortions on firm-level innovation, productivity dynamics and TFP," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 114-129.

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