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GTAP Resource #6118

"Implicit Utility and the Canonical Gravity Model"
by Hillberry, Russell and Anton Yang

The primary advantage of structural approaches to estimating the gravity model of trade is that they allow a transparent mapping of regression coefficients to structural parameters. Unfortunately, existing structural estimation methods are unable to separately identify trade costs and the trade elasticity without incorporating external data. We demonstrate that theoretical structure is alone sufficient for identifying all of the structural parameters of the canonical constant elasticity of substitution (CES) gravity model. We accomplish this by adopting an implicitly indirect representation of utility and estimating structurally using a mathematical program with equilibrium constraints. Our estimate of the elasticity of substitution is much smaller than in much of the rest of the literature, an outcome that we attribute to Pigou’s Law, which ties income and substitution elasticities together in demand systems that assume additive preferences. This restriction is undesirable in demand systems, generally, and is a critical weakness for the canonical gravity model, a model that is commonly used to interpret the geographic trade pattern and to infer the welfare gains from trade.

Resource Details (Export Citation) GTAP Keywords
Category: 2020 Conference Paper
Status: Published
By/In: Presented during the 23rd Annual Conference on Global Economic Analysis (Virtual Conference)
Date: 2020
Created: Yang, A. (4/15/2020)
Updated: Yang, A. (6/18/2020)
Visits: 1,569
- Calibration and parameter estimation
- Non-Tariff barriers
- Other data bases and data issues

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