Working Paper: NBER ID: w30809
Authors: James E. Anderson; Yoto V. Yotov
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.
Keywords: gravity models; trade elasticity; international elasticity puzzle; bilateral trade costs
JEL Codes: F10; F14; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bilateral trade costs (F10) | trade elasticity estimates (C51) |
| long-run trade elasticity (F14) | short-run trade elasticity (F14) |
| lag-interval-varying adjustment parameter (C22) | time-varying trade elasticity (F14) |
| time increases (C41) | proportion of firms that have adjusted (L25) |
| trade elasticities across studies (C51) | length of estimating samples (C80) |