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The Elasticity of Substitution in Demand for Non-Tradable Goods in Bolivia

  • Gover Barja Daza
  • Javier Monterrey Arce
  • Sergio Villarroel Bohrt

This paper uses a CES function to estimate the constant elasticity of substitution in consumption for non-tradables relative to tradables in a dependent economy framework. The methodology for generating data on real consumption of tradable and non-tradable goods, real prices of tradable and non-tradable goods and real absorption is based on the Bolivian Input-Output Matrix, producing quarterly data for the period 1990. 1 to 2002. 4. The data identify Bolivia as a country highly open to trade, with an average ratio of 55 percent in the value of exports and imports relative to GDP, non-tradable production accounting for 52 percent of GDP, and differences in the behavior of the internal and external real exchange rates. The HEGY test is used to identify and separate out seasonal unit roots in the data. A cointegration relationship was found between real absorption, the non-tradable to tradable consumption ratio and the non-tradable to tradable price ratio, suggesting inelasticity of substitution.

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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 3181.

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Date of creation: Feb 2005
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Handle: RePEc:idb:wpaper:3181
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  1. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, March.
  2. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
  3. de Cordoba, Gonzalo Fernandez & Kehoe, Timothy J., 2000. "Capital flows and real exchange rate fluctuations following Spain's entry into the European Community," Journal of International Economics, Elsevier, vol. 51(1), pages 49-78, June.
  4. Hylleberg, S. & Engle, R.F. & Granger, C.W.J. & Yoo, B.S., 1988. "Seasonal, Integration And Cointegration," Papers 6-88-2, Pennsylvania State - Department of Economics.
  5. Alejandro Izquierdo & Ernesto Talvi & Guillermo A. Calvo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," Research Department Publications 4299, Inter-American Development Bank, Research Department.
  6. Engel, Charles & Kletzer, Kenneth, 1989. "Saving and Investment in an Open Economy with Non-traded Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 735-52, November.
  7. Marianne Baxter & Urban J. Jermann & Robert G. King, 1995. "Nontraded Goods, Nontraded Factors, and International Non-Diversification," NBER Working Papers 5175, National Bureau of Economic Research, Inc.
  8. Mendoza, Enrique G. & Uribe, Martin, 2000. "Devaluation risk and the business-cycle implications of exchange-rate management," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 239-296, December.
  9. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
  10. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany.
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