Estimating Import Demand Function in Developing Countries: A Structural Econometric Approach with Applications to India and Sri Lanka

30 Pages Posted: 11 Aug 2007

See all articles by M. Shahe Emran

M. Shahe Emran

George Washington University - Department of Economics

Forhad Shilpi

World Bank - Development Research Group (DECRG)

Date Written: June 1, 2007

Abstract

Due to the unavailability of time series data on domestic market clearing price of imports, the estimation of notional price and income elasticities of aggregate import demand remains a daunting task for a large number of developing countries. This paper develops a structural econometric model of a two goods representative agent economy that incorporates a binding foreign exchange constraint at the administered prices of imports. A theoretically consistent parameterization of the virtual relative price of imports circumvents the data problem, and thus enables the estimation of income and price responses by cointegration approach. The price and income elasticity estimates for India and Sri Lanka, in contrast to the extant literature, have correct signs, high statistical significance, and plausible magnitudes.

Keywords: import demand, foreign exchange rationing, virtual price, India, Sri Lanka, cointegration

JEL Classification: F14, O16

Suggested Citation

Emran, M. Shahe and Shilpi, Forhad, Estimating Import Demand Function in Developing Countries: A Structural Econometric Approach with Applications to India and Sri Lanka (June 1, 2007). Available at SSRN: https://ssrn.com/abstract=1005976 or http://dx.doi.org/10.2139/ssrn.1005976

M. Shahe Emran (Contact Author)

George Washington University - Department of Economics ( email )

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Forhad Shilpi

World Bank - Development Research Group (DECRG) ( email )

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Washington, DC 20433
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202-522-1151 (Fax)

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