Working Paper: CEPR ID: DP9951
Authors: Robert Feenstra; Philip Luck; Maurice Obstfeld; Katheryn N. Russ
Abstract: The elasticity of substitution between goods from different countries?the Armington elasticity?is important for many questions in international economics, but its magnitude is subject to debate: the "macro" elasticity between home and import goods is often found to be smaller than the "micro" elasticity between foreign sources of imports. We investigate these two elasticities in a model using a nested CES preference structure. We explore estimation techniques for the macro and micro elasticities using both simulated data from a Melitz-style model, and highly disaggregate U.S. production data matched to Harmonized System trade data. We find that in up to one-half of goods there is no significant difference between the macro and micro elasticities, but in the other half of goods the macro elasticity is significantly lower than the micro elasticity, even when they are estimated at the same level of disaggregation.
Keywords: Armington elasticity; CGE; trade models; disaggregate trade equations; effects of devaluation; elasticity of trade
JEL Codes: F12; F14; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Armington elasticity (F16) | macro elasticity (E19) |
| Armington elasticity (F16) | micro elasticity (D39) |
| macro elasticity (E19) | micro elasticity (D39) |
| moment conditions (C41) | macro elasticity estimates (C51) |
| currency devaluation (F31) | aggregate imports (E10) |