Armington Elasticities: Estimates for Uruguayan Manufacturing Sectors

Abstract

Armington elasticities of substitution – AEs – are a crucial set of parameters that allows CGEMs applied to trade to be operational. In the case of Uruguay, no estimated values for these parameters have been available until now, forcing researchers to impose them arbitrarily. We here start filling this gap by providing estimated AEs for 32 Uruguayan 4-digit manufacturing industries belonging to the Food, Beverages and Tobacco; Chemical Products; and Textiles economic sectors, using monthly and quarterly data along 1989-2001. The specification of the models follows the simplified benchmark proposed by Armington (1969) that has been used in most of the existing applied research. The resulting estimated AEs are in line with those reported by the international literature and hence of a smaller size than expected by CGEM modellers. Our econometric analyses also show that the low values of the estimated elasticities are not due to the characteristics of the available data and/or the methodology used. Instead, a plausible explanation suggested by our results relates to the theoretical models used being misspecified, particularly due to the omission of relevant variables.

Keywords: Armington elasticity, Substitutability, Computable General Equilibrium Model

JEL Classification: B40, F14, F17