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International Trade without CES: Estimating Translog Gravity

  • Novy, Dennis

    (University of Warwick)

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 countrys 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://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/research/papers/32.2010_novy.pdf
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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 32.

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Date of creation: 2010
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Handle: RePEc:cge:wacage:32
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