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The Elasticity of Substitution between Domestic and Foreign Goods: A Quantitative Survey

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  • Josef Bajzik
  • Tomas Havranek
  • Zuzana Irsova
  • Jiri Schwarz

Abstract

A key parameter in international economics is the elasticity of substitution between domestic and foreign goods, also called the Armington elasticity. Yet estimates vary widely. We collect 3,524 reported estimates of the elasticity from 42 studies over 1977-2018, construct 34 variables that reflect the context in which researchers obtain their estimates, and examine what drives the heterogeneity in the results. To account for the inherent model uncertainty, we employ Bayesian and frequentist model averaging. We present the first application of newly developed non-linear techniques to correct for publication bias. Our main results are threefold. First, there is publication bias against small and statistically insignificant elasticities. Second, the differences in the results are best explained by differences in data: aggregation, frequency, size, and dimension. Third, the mean elasticity implied by the literature after correcting for both publication bias and potential misspecifications is 2.

Suggested Citation

  • Josef Bajzik & Tomas Havranek & Zuzana Irsova & Jiri Schwarz, 2019. "The Elasticity of Substitution between Domestic and Foreign Goods: A Quantitative Survey," Working Papers 2019/12, Czech National Bank.
  • Handle: RePEc:cnb:wpaper:2019/12
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    References listed on IDEAS

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    More about this item

    Keywords

    Armington; Bayesian model averaging; meta-analysis; publication bias; trade elasticity;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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