International Trade and Monopolistic Competition without CES: Estimating Translog Gravity

Dennis Novy

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and rich substitution patterns across goods. In contrast to standard CES-based gravity equations, 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 strong empirical support in its favor. In an application to the currency union effect, I find that a currency union is only associated with substantially higher bilateral trade if the exporting country provides a small share of the destination country's imports. For other pairs, the currency union effect is modest or indistinguishable from zero. I test the translog gravity equation and find strong empirical support in it's favour.

Keywords: Translog; Gravity; Trade Costs, Distance, Trade Cost Elasticy JEL Codes: F11; F12; F15 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-int and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://warwick.ac.uk/fac/soc/economics/research/w ... s/2010/twerp_929.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:929

Access Statistics for this paper

More papers in The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Margaret Nash ().