Are Armington Elasticities Different Across Countries and Sectors?

32 Pages Posted: 3 Apr 2015

See all articles by Zoryana Olekseyuk

Zoryana Olekseyuk

Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE)

Hannah Schürenberg-Frosch

University of Duisburg-Essen

Date Written: November 9, 2014

Abstract

CGE models are widely used for policy evaluation and impact analysis especially with respect to trade reforms, tax reforms, energy sector reform and development policy analysis. However, the results of such models are often argued to be sensitive to the choice of exogenous parameters such as trade elasticities. Several authors show that the choice of the so-called Armington elasticities in the import demand function has a strong influence on the simulation results. Most existing estimates of Armington elasticities are only for the US. The few studies for other countries find substantially differing results. Nevertheless, many CGE modelers simply adopt the elasticities from the literature. This paper aims at providing estimated elasticities based on recent data for a larger group of European countries. Using cointegration and panel fixed effects analyses we estimate the first order condition resulting from cost minimization or utility maximization subject to the CES sub-utility or cost function in imports and domestic goods. The results show a rather large variation across sectors and countries and the magnitude is only partly comparable to the US elasticities. Moreover, in a small CGE application we are able to show that changing the elasticity set has a quantitative and even qualitative impact on CGE model results, which confirms the concern that one might end up with biased results due to a misspecification of the elasticities.

Keywords: Armington; trade elasticities; computable general equilibrium; Europe

JEL Classification: F14, C68, F17

Suggested Citation

Olekseyuk, Zoryana and Schürenberg-Frosch, Hannah, Are Armington Elasticities Different Across Countries and Sectors? (November 9, 2014). Ruhr Economic Paper No. 513, Available at SSRN: https://ssrn.com/abstract=2562389 or http://dx.doi.org/10.2139/ssrn.2562389

Zoryana Olekseyuk (Contact Author)

Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE) ( email )

Tulpenfeld 4
Bonn, 53113
Germany

Hannah Schürenberg-Frosch

University of Duisburg-Essen ( email )

Universitätsstr. 12
Essen, 45117
Germany
+49 201 183 3010 (Phone)
+49 201 183 3974 (Fax)

HOME PAGE: http://www.iwb.wiwi.uni-due.de/team/hannah-schuerenberg/

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