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Elasticity Optimism

  • Jean Imbs

    (HEC Lausanne, Swiss Finance Institute and CEPR)

  • Isabelle Mejean

    (Ecole Polytechnique)

Estimates of the elasticity of substitution between domestic and foreign varieties are small in macroeconomic data, but substantially larger in disaggregated microeconomic studies. This may be an artifact of heterogeneity. We use disaggregated multilateral trade data to structurally identify imports elasticities in the US. We spell out a partial equilibrium model to aggregate them adequately at the country level. We compare aggregate elasticities that impose equality across sectors, to estimates allowing for heterogeneity. The former are similar in value to conventional macroeconomic estimates; but they are more than twice larger -up to 5 - with heterogeneity. The parameter is central to calibrated models in most of international economics. We discuss the difference our corrected estimate makes in various areas of international economics, including the dynamics of external balances, the international transmission of shocks, international portfolio choice and optimal monetary policy.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0805.

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Length: 37 pages
Date of creation: 2008
Date of revision: Mar 2008
Handle: RePEc:eie:wpaper:0805
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