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Estimating gravity from the short to the long run: A simple solution to the 'International Elasticity Puzzle'

Author

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  • James Anderson

    (Boston College)

  • Yoto Yotov

    (Drexel University)

Abstract

We propose a simple and flexible reduced-form econometric approach to estimate gravity models in the short and the long run. The theoretical lens for interpreting our methods amends the canonical Lucas-Prescott adjustment formulation to allow for time-interval-varying depreciation-cum-adjustment. A time-varying trade elasticity in the structural gravity model is implied. Our methods explain the `international elasticity puzzle,' the discrepancy between trade elasticity estimates from the trade literature and the international real business cycle literature. The same theory-motivated estimating equation applied to the same data generates a distribution of trade elasticity estimates that vary from 0.4 in the short run to 4.8 in the long run. The results offer support for some existing theories of dynamic adjustment in trade costs and imply that the long-run equilibrium in our sample is reached in about 16 to 17 years.

Suggested Citation

  • James Anderson & Yoto Yotov, 2022. "Estimating gravity from the short to the long run: A simple solution to the 'International Elasticity Puzzle'," School of Economics Working Paper Series 2022-14, LeBow College of Business, Drexel University.
    • Handle: RePEc:ris:drxlwp:2022_014
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    Cited by:

    1. Chaban, Maxym, 2024. "Exchange rate dynamics and consumption of traded goods," Journal of Macroeconomics, Elsevier, vol. 80(C).
    2. William Ridley & Farzana Shirin, 2025. "The effectiveness of development‐oriented nonreciprocal trade preferences in promoting agricultural trade," American Journal of Agricultural Economics, John Wiley & Sons, vol. 107(1), pages 81-107, January.
    3. Yilmazkuday, Hakan, 2024. "Diminishing gains from trade across countries: Interaction between trade elasticity and openness," Journal of International Money and Finance, Elsevier, vol. 141(C).
    4. Feodora Teti, 2023. "Missing Tariffs," Rationality and Competition Discussion Paper Series 458, CRC TRR 190 Rationality and Competition.
    5. Sunil P. Dhoubhadel & William Ridley, 2025. "China's meat sector growth and U.S. grain and oilseed exports," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 47(1), pages 275-303, March.

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    Keywords

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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