Optimism Bias? The Elasticity Puzzle in International Economics Revisited

36 Pages Posted: 18 Oct 2012

See all articles by Vesna Corbo

Vesna Corbo

Sveriges Riksbank - Monetary Policy

Chiara Osbat

European Central Bank (ECB)

Date Written: October 2012

Abstract

The elasticity of substitution between domestic and imported goods is a central parameter in macroeconomic models, but after decades of empirical studies there is no consensus on its magnitude. Earlier literature using time series arrives at low values, while more recent studies using panel-based econometric methods on disaggregated data find higher values. We examine the econometric methodology of this more recent literature, which follows the seminal work by Feenstra (1994), looking in more detail at the effect on the results of the non-linear mapping between reduced-form and structural parameters. Our main contribution is the use of bootstrap methods, which offer more insight into the Feenstra method and can explain why researchers applying it may tend to find high estimates. The bootstrap not only allows us to obtain considerably less biased estimates of the structural elasticity parameter, but also to better characterize their accuracy, a point vastly overlooked by the literature.

Keywords: Trade elasticities, elasticity of substitution, heterogeneity, bootstrap

JEL Classification: C14, C23, F14

Suggested Citation

Corbo, Vesna and Osbat, Chiara, Optimism Bias? The Elasticity Puzzle in International Economics Revisited (October 2012). ECB Working Paper No. 1482, Available at SSRN: https://ssrn.com/abstract=2151247

Vesna Corbo (Contact Author)

Sveriges Riksbank - Monetary Policy ( email )

SE-103 37 Stockholm
Sweden

Chiara Osbat

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6821 (Phone)
+49 69 1344 6000 (Fax)

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