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Elasticity Optimism

Author

Listed:
  • Jean Imbs

    (HEC Lausanne)

  • Isabelle Mˆmjean

    (Ecole Polytechnique)

Abstract

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 elasticities of substitution in US goods. 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.

Suggested Citation

  • Jean Imbs & Isabelle Mˆmjean, 2008. "Elasticity Optimism," Working Papers 242008, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:242008
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    More about this item

    Keywords

    Trade Elasticities; Aggregation; Calibration; Global Imbalances; International Transmission; International Portfolio; Monetary Policy;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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