Discussion Paper Details

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Title: The International Elasticity Puzzle Is Worse Than You Think

Author(s): Lionel Fontagne, Philippe Martin and Gianluca Orefice

Publication Date: February 2017

Keyword(s): export prices and international elasticity puzzle

Programme Area(s): International Macroeconomics and Finance and International Trade and Regional Economics

Abstract: We estimate three international price elasticities using exporters data: the elasticity of firm exports to export price, tariff and real exchange rate shocks. In standard trade and international macroeconomics models these three elasticities should be equal. We find that this is far from being the case. We use French firm level electricity costs to instrument for export prices and provide a first estimate of the elasticity of firm-level exports to export prices. The elasticity of exports is highest, around 5, for export prices followed by tariffs, around 2, and is lowest for the real exchange rate, around 0.6. The large discrepancy between these elasticities makes us conclude that the international elasticity puzzle is actually worse than previously thought. Moreover, we show that because exporters absorb part of tariffs and exchange rate movements, estimates of export elasticities that do not take into account export prices are biased.

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Bibliographic Reference

Fontagne, L, Martin, P and Orefice, G. 2017. 'The International Elasticity Puzzle Is Worse Than You Think'. London, Centre for Economic Policy Research.