Estimating Gravity from the Short to the Long Run: A Simple Solution to the 'International Elasticity Puzzle' / James E. Anderson, Yoto V. Yotov.

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Anderson, James E

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w30809.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We propose a simple and flexible reduced-form econometric approach to estimate gravity models in the short and the long run. The theoretical lens for interpreting our methods amends the canonical Lucas-Prescott adjustment formulation to allow for time-interval-varying depreciation-cum-adjustment. A time-varying trade elasticity in the structural gravity model is implied. Our methods explain the 'international elasticity puzzle,' the discrepancy between trade elasticity estimates from the trade literature and the international real business cycle literature. The same theory-motivated estimating equation applied to the same data generates a distribution of trade elasticity estimates that vary from 0.4 in the short run to 4.8 in the long run. The results offer support for some existing theories of dynamic adjustment in trade costs and imply that the long-run equilibrium in our sample is reached in about 16 to 17 years.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w30809 (Browse shelf(Opens below))	Not For Loan

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December 2022.

We propose a simple and flexible reduced-form econometric approach to estimate gravity models in the short and the long run. The theoretical lens for interpreting our methods amends the canonical Lucas-Prescott adjustment formulation to allow for time-interval-varying depreciation-cum-adjustment. A time-varying trade elasticity in the structural gravity model is implied. Our methods explain the 'international elasticity puzzle,' the discrepancy between trade elasticity estimates from the trade literature and the international real business cycle literature. The same theory-motivated estimating equation applied to the same data generates a distribution of trade elasticity estimates that vary from 0.4 in the short run to 4.8 in the long run. The results offer support for some existing theories of dynamic adjustment in trade costs and imply that the long-run equilibrium in our sample is reached in about 16 to 17 years.