Elasticity Optimism

Jean Imbs and Isabelle Mˆmjean
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Isabelle Mˆmjean: Ecole Polytechnique
Authors registered in the RePEc Author Service: Isabelle Mejean

No 242008, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Estimates of the elasticity of substitution between domestic and foreign varieties are small in macroeconomic data, but substantially larger in disaggregated microeconomic studies. This may be an artifact of heterogeneity. We use disaggregated multilateral trade data to structurally identify elasticities of substitution in US goods. We spell out a partial equilibrium model to aggregate them adequately at the country level. We compare aggregate elasticities that impose equality across sectors, to estimates allowing for heterogeneity. The former are similar in value to conventional macroeconomic estimates; but they are more than twice larger -up to 5 - with heterogeneity. The parameter is central to calibrated models in most of international economics. We discuss the difference our corrected estimate makes in various areas of international economics, including the dynamics of external balances, the international transmission of shocks, international portfolio choice and optimal monetary policy.

Keywords: Trade Elasticities; Aggregation; Calibration; Global Imbalances; International Transmission; International Portfolio; Monetary Policy (search for similar items in EconPapers)
JEL-codes: F21 F32 F41 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2008-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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