Estimating Industry-level Armington Elasticities For EMU Countries

In an open economy economic agents distribute their spending between domestic and various import goods and they may reconsider their choice whenever relative international prices change. Armington elasticities quantify these reallocations in demand for goods produced in different countries. Recent analytical frameworks allow to further differentiate between a macro elasticity of substitution between domestic and import goods and a micro elasticity between different import sources. Despite the relevance of Armington elasticities for evaluating trade policy there has been no systematic study on whether micro and macro elasticities significantly differ for highly integrated economies within a free trade area and whether there is a common pattern. Using highly disaggregated data, this paper estimates Armington elasticities for a panel of 15 EMU Member States. Empirical results indicate a significant difference between micro and macro elasticities for up to one half of the consistent product groups considered, implying preferences across EMU countries are not perfectly aligned with non-discriminatory tariffs. I conclude that both the absolute and relative macro elasticities are informative and that heterogeneous preference patterns link to current trade imbalances. (author's abstract)