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The International Elasticity Puzzle Is Worse Than You Think

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  • Fontagne, Lionel
  • Martin, Philippe
  • Orefice, Gianluca

Abstract

We estimate three international price elasticities using exporters data: the elasticity of firm exports to export price, tariff and real exchange rate shocks. In standard trade and international macroeconomics models these three elasticities should be equal. We find that this is far from being the case. We use French firm level electricity costs to instrument for export prices and provide a first estimate of the elasticity of firm-level exports to export prices. The elasticity of exports is highest, around 5, for export prices followed by tariffs, around 2, and is lowest for the real exchange rate, around 0.6. The large discrepancy between these elasticities makes us conclude that the international elasticity puzzle is actually worse than previously thought. Moreover, we show that because exporters absorb part of tariffs and exchange rate movements, estimates of export elasticities that do not take into account export prices are biased.

Suggested Citation

  • Fontagne, Lionel & Martin, Philippe & Orefice, Gianluca, 2017. "The International Elasticity Puzzle Is Worse Than You Think," CEPR Discussion Papers 11855, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11855
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    Cited by:

    1. Jeanne, Olivier & Son, Jeongwon, 2020. "To What Extent Are Tariffs Offset By Exchange Rates?," CEPR Discussion Papers 15125, C.E.P.R. Discussion Papers.
    2. Clément Malgouyres & Thierry Mayer, 2018. "Exports and labor costs: evidence from a French policy," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 429-454, August.
    3. Agnès Bénassy-Quéré & Matthieu Bussière & Pauline Wibaux, 2018. "Trade and currency weapons," Working Papers 2018-08, CEPII research center.
    4. Charlotte Emlinger & Sébastien Jean & Vincent Vicard, 2019. "L’étonnante atonie des exportations françaises : retour sur la compétitivité et ses déterminants," CEPII Policy Brief 2019-24, CEPII research center.
    5. Boehm, Christoph & Levchenko, Andrei A. & Pandalai-Nayar, Nitya, 2020. "The Long and Short (Run) of Trade Elasticities," CEPR Discussion Papers 14645, C.E.P.R. Discussion Papers.
    6. Piveteau, Paul & Smagghue, Gabriel, 2019. "Estimating firm product quality using trade data," Journal of International Economics, Elsevier, vol. 118(C), pages 217-232.
    7. Lionel Fontagné & Houssein Guimbard & Gianluca Orefice, 2019. "Product-Level Trade Elasticities," Working Papers 2019-17, CEPII research center.
    8. Silvia Fabiani & Alberto Felettigh & Claire Giordano & Roberto Torrini, 2019. "Making room for new competitors. A comparative perspective on Italy’s exports in the euro-area market," Questioni di Economia e Finanza (Occasional Papers) 530, Bank of Italy, Economic Research and International Relations Area.
    9. Eddy Bekkers & Alessandro Antimiani & Caitlyn Carrico & Dorothee Flaig & Lionel Fontagne & Jean Foure & Joseph Francois & Ken Itakura & Zornitsa Kutlina-Dimitrova & William Powers & Bert Saveyn & Robe, 2020. "Modelling Trade and Other Economic Interactions Between Countries in Baseline Projections," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 5(1), pages 273-345, June.
    10. Willem THORBECKE & Nimesh SALIKE & CHEN Chen, 2020. "China's Exports in a Protectionist World," Discussion papers 20011, Research Institute of Economy, Trade and Industry (RIETI).
    11. Alvaro Espitia & Nadia Rocha & Michele Ruta, 2020. "Trade in Critical COVID-19 Products," World Bank Other Operational Studies 33514, The World Bank.
    12. Figueiredo, Erik & Lima, Luiz Renato & Orefice, Gianluca, 2020. "Migration, trade and spillover effects," Journal of Comparative Economics, Elsevier, vol. 48(2), pages 405-421.
    13. Fitzgerald, Doireann & Haller, Stefanie, 2018. "Exporters and shocks," Journal of International Economics, Elsevier, vol. 113(C), pages 154-171.
    14. Bruno Ducoudre & Xavier Timbeau & Sébastien Villemot, 2018. "The magnitude of euro area misalignments," Sciences Po publications 45, Sciences Po.
    15. Hélène Latzer & Kiminori Matsuyama & Mathieu Parenti, 2019. "Reconsidering the Market Size Effect in Innovation and Growth," Working Papers ECARES 2019-31, ULB -- Universite Libre de Bruxelles.
    16. Thorbecke, Willem, 2019. "East Asian value chains, exchange rates, and regional exchange rate arrangements," Journal of Asian Economics, Elsevier, vol. 65(C).
    17. Antoine Berthou & Emannuel Dhyne, 2018. "Exchange rate movements,firm-level exports and heterogeneity," Working Paper Research 334, National Bank of Belgium.
    18. Dinopoulos, Elias & Kalyvitis, Sarantis & Katsimi, Margarita, 2020. "Variable export price elasticity, product quality, and credit constraints: Theory and evidence from Greek firms," Journal of International Money and Finance, Elsevier, vol. 104(C).
    19. Lionel Fontagné & Houssein Guimbard & Gianluca Orefice, 2020. "Product-Level Trade Elasticities: Worth Weighting For," Working Papers DT/2020/08, DIAL (Développement, Institutions et Mondialisation).
    20. Bruno Ducoudre & Nicolas Yol, 2018. "Evaluation de l'impact du CICE par une méthode," Sciences Po publications 30, Sciences Po.
    21. Antoine GODIN & Sakir-Devrim YILMAZ, 2020. "Modelling Small Open Developing Economies in a Financialized World: A Stock-Flow Consistent Prototype Growth Model," Working Paper 5eb7e0e8-560f-4ce6-91a5-5, Agence française de développement.

    More about this item

    Keywords

    export prices; international elasticity puzzle;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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