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International Trade Without CES: Estimating Translog Gravity

  • Dennis Novy

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and 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.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1031.

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Date of creation: Dec 2010
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Handle: RePEc:cep:cepdps:dp1031
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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