Discussion Paper Details

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Title: International Trade without CES: Estimating Translog Gravity

Author(s): Dennis Novy

Publication Date: September 2012

Keyword(s): Distance, Gravity, Import Share, Trade Cost Elasticity, Trade Costs and Translog

Programme Area(s): International Trade and Regional Economics

Abstract: This paper derives a micro-founded gravity equation based on a translog demand system that allows for flexible substitution patterns across goods. In contrast to the standard CES-based gravity equation, translog gravity generates an endogenous trade cost elasticity. Trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country's imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find empirical evidence that is in many ways consistent with its predictions.

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Bibliographic Reference

Novy, D. 2012. 'International Trade without CES: Estimating Translog Gravity'. London, Centre for Economic Policy Research.