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International Trade without CES: Estimating Translog Gravity

International Trade without CES: Estimating Translog Gravity

32/2010 Dennis Novy
working papers,culture and development
Journal of International Economics
http://dx.doi.org/10.1016/j.jinteco.2012.08.010

32/2010 Dennis Novy

This paper derives a micro-founded gravity equation in general equilibrium based on a trans-log demand system that allows for endogenous mark-ups and 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 trans-log gravity equation and find strong empirical support in its favour.

Culture and Development

Journal of International Economics

http://dx.doi.org/10.1016/j.jinteco.2012.08.010