IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20121482.html
   My bibliography  Save this paper

Optimism bias? The elasticity puzzle in international economics revisited

Author

Listed:
  • Osbat, Chiara
  • Corbo, Vesna

Abstract

The elasticity of substitution between domestic and imported goods is a central parameter in macroeconomic models, but after decades of empirical studies there is no consensus on its magnitude. Earlier literature using time series arrives at low values, while more recent studies using panel-based econometric methods on disaggregated data find higher values. We examine the econometric methodology of this more recent literature, which follows the seminal work by Feenstra (1994), looking in more detail at the effect on the results of the non-linear mapping between reduced-form and structural parameters. Our main contribution is the use of bootstrap methods, which offer more insight into the Feenstra method and can explain why researchers applying it may tend to find high estimates. The bootstrap not only allows us to obtain considerably less biased estimates of the structural elasticity parameter, but also to better characterize their accuracy, a point vastly overlooked by the literature. JEL Classification: C14, C23, F14

Suggested Citation

  • Osbat, Chiara & Corbo, Vesna, 2012. "Optimism bias? The elasticity puzzle in international economics revisited," Working Paper Series 1482, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20121482
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1482.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Jean Imbs & Isabelle Mejean, 2015. "Elasticity Optimism," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 43-83, July.
    2. Cavaliere, Giuseppe & Rahbek, Anders & Taylor, A.M. Robert, 2010. "Testing for co-integration in vector autoregressions with non-stationary volatility," Journal of Econometrics, Elsevier, vol. 158(1), pages 7-24, September.
    3. Davidson, Russell & Flachaire, Emmanuel, 2008. "The wild bootstrap, tamed at last," Journal of Econometrics, Elsevier, vol. 146(1), pages 162-169, September.
    4. Feenstra & R.C., 1990. "New Goods and Index Members: U.S. Import Prices," Papers 371, California Davis - Institute of Governmental Affairs.
    5. Hélène Erkel-Rousse & Daniel Mirza, 2002. "Import price elasticities: reconsidering the evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 35(2), pages 282-306, May.
    6. Flachaire, Emmanuel, 2005. "Bootstrapping heteroskedastic regression models: wild bootstrap vs. pairs bootstrap," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 361-376, April.
    7. Cavaliere, Giuseppe & Rahbek, Anders & Taylor, A.M. Robert, 2010. "Cointegration Rank Testing Under Conditional Heteroskedasticity," Econometric Theory, Cambridge University Press, vol. 26(06), pages 1719-1760, December.
    8. Murray C. Kemp, 1962. "Errors Of Measurement And Bias In Estimates Of Import Demand Parameters1," The Economic Record, The Economic Society of Australia, vol. 38(83), pages 369-372, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    bootstrap; Elasticity of Substitution; heterogeneity; trade elasticities;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20121482. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications). General contact details of provider: http://edirc.repec.org/data/emieude.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.