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Trade elasticities for G-7 countries

  • Peter Hooper
  • Karen Johnson
  • Jaime Marquez
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    This paper reports the results of a project to estimate and test the stability properties of conventional equations relating real imports and exports of goods and services for the G-7 countries to their incomes and relative prices. We begin by estimating cointegration vectors and the error-correction formulations. We then test the stability of these equations using Chow and Kalman-Filter tests. The evidence suggests three findings. First, conventional trade equations and elasticities are stable enough, in most cases, to perform adequately in forecasting and policy simulations. Equations for German trade, as well as equations for French and Italian exports, are an exception. Second, income elasticities of U.S. trade have not been shifting in a direction that will tend to ease the trend toward deterioration in the U.S. trade position. The income-elasticity gap for Japan found in earlier studies was not confirmed in this analysis. Finally, the price channel is weak, if not wholly ineffective, in the case of continental European countries.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1998/609/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1998/609/ifdp609.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 609.

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    Date of creation: 1998
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    Handle: RePEc:fip:fedgif:609
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    1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    2. Marquez, Jaime, 1990. "Bilateral Trade Elasticities," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 70-77, February.
    3. Sawyer, W. Charles & Sprinkle, Richard L., 1997. "The Demand for Imports and Exports in Japan: A Survey," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 247-259, June.
    4. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
    5. Stern, Robert M & Baum, Christopher F & Greene, Mark N, 1979. "Evidence on Structural Change in the Demand for Aggregate U.S. Imports and Exports," Journal of Political Economy, University of Chicago Press, vol. 87(1), pages 179-92, February.
    6. Ceglowski, Janet, 1997. "On the structural stability of trade equations: the case of Japan," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 491-512, June.
    7. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
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