Understanding the international elasticity puzzle

Hakan Yilmazkuday

Journal of Macroeconomics, 2019, vol. 59, issue C, 140-153

Abstract: International trade studies have higher macro elasticity measures compared to international finance studies, which has evoked mixed policy implications regarding the effects of a change in trade costs versus exchange rates on welfare measures. This so-called international elasticity puzzle is investigated in this paper by drawing attention to the alternative strategies that the two literatures use for the aggregation of foreign products in consumer utility functions. Using the implications of having a finite number of foreign countries in nested CES frameworks that are consistent with the two literatures, the discrepancy between the elasticity measures is explained by showing theoretically and confirming empirically that the macro elasticity in international trade is a weighted average of the macro elasticity in international finance and the corresponding elasticity of substitution across products of foreign source countries.

Keywords: International elasticity puzzle; International trade and finance (search for similar items in EconPapers)
JEL-codes: F12 F14 F41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Understanding the International Elasticity Puzzle (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:59:y:2019:i:c:p:140-153

DOI: 10.1016/j.jmacro.2018.11.010

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