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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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-04/cesifo1_wp3008rev.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3008.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3008
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