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International Trade without CES: Estimating Translog Gravity

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  • Dennis Novy

Abstract

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.

Suggested Citation

  • Dennis Novy, 2010. "International Trade without CES: Estimating Translog Gravity," CESifo Working Paper Series 3008, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3008
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    References listed on IDEAS

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    More about this item

    Keywords

    translog; gravity; trade costs; distance; trade cost elasticity;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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