The Elasticity of Substitution in Demand for Non-Tradable Goods in Bolivia

Gover Barja Daza, Javier Monterrey Arce and Sergio Villarroel Böhrt

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Abstract: This paper estimates the constant elasticity of substitution (CES) between non-tradable and tradable consumption within a dependent economy framework. Utilizing data derived from the Bolivian Input-Output Matrix, we construct a novel quarterly dataset spanning 1990:Q1 to 2002:Q4 for real absorption, consumption, and relative prices of tradable and non-tradable goods. Descriptive indicators characterize Bolivia as a highly open economy—with an average trade-to-GDP ratio of 55 percent and non-tradable production accounting for 52 percent of GDP—while revealing divergent behaviors between internal and external real exchange rates. To address seasonal variations, we employ the Hylleberg-Engle-Granger-Yoo (HEGY) test to identify and isolate seasonal unit roots. Cointegration analysis establishes a long-run relationship between real absorption, the consumption ratio, and the relative price ratio. Ultimately, the empirical results yield an elasticity of substitution of 0.72. This confirms inelastic, low-substitution behavior, indicating that Bolivian consumers face structural rigidities when attempting to substitute non-tradables for tradables in response to relative price shifts.

Keywords: Constant Elasticity of Substitution; Tradable and Non-tradable Goods; Dependent Economy Framework; Bolivian Economy; HEGY Seasonal Unit Root Test; Cointegration Analysis; Real Exchange Rate (search for similar items in EconPapers)
JEL-codes: C32 F14 F41 O54 (search for similar items in EconPapers)
Date: 2005
Note: This paper was written for the IDB project - The Elasticity of Substitution in Demand for Non-Tradable Goods in Latin America - coordinated by Alejandro Izquierdo, Arturo Galindo, and Enrique Mendoza. The authors would like to thank the IDB for their funding, following the research proposal's selection through a competitive process. The paper was originally completed in November 2003 and published by February 2005. Participating institutions and countries: Universidad Torcuato di Tella, Argentina; Maestrías para el Desarrollo-Universidad Católica Boliviana, Bolivia; Ecoanálisis, Costa Rica; Centro de Investigaciones Económicas, Uruguay.
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Working Paper: The Elasticity of Substitution in Demand for Non-Tradable Goods in Bolivia (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:344194

DOI: 10.2139/ssrn.1814744

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