Trade Adjustment in the European Union - A Structural Estimation Approach

59 Pages Posted: 8 May 2013

See all articles by Vesna Corbo

Vesna Corbo

Sveriges Riksbank - Monetary Policy

Chiara Osbat

European Central Bank (ECB)

Date Written: April 8, 2013

Abstract

We estimate the elasticity of substitution of a country’s imports, and that of its exports on the world market, for EU countries using sector level trade data. We present a new empirical strategy based on the identification scheme by Feenstra (1994), which enables the estimation of elasticities from data on exports. Moreover, our use of bootstrap methods allows us to obtain better elasticity measures, and to better characterize their accuracy. Our results show much heterogeneity in the estimates of the elasticity of substitution across industrial sectors. This, in turn, points to heterogeneity across countries, due to different production and trade structures. We obtain aggregate elasticities for the EU27 countries, with a mean of 3.5 for imports and 4.0 for exports, bringing us closer to traditional estimates and bridging the gap between the newer micro data estimates and the more traditional estimates found in the macroeconomic literature.

Keywords: Elasticity of substitution, Heterogeneity, Aggregation, Calibration of macroeconomic models

JEL Classification: C23, F14, F47

Suggested Citation

Corbo, Vesna and Osbat, Chiara, Trade Adjustment in the European Union - A Structural Estimation Approach (April 8, 2013). ECB Working Paper No. 1535, Available at SSRN: https://ssrn.com/abstract=2246577

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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