Understanding the International Elasticity Puzzle

33 Pages Posted: 6 Oct 2016 Last revised: 28 Nov 2018

See all articles by Hakan Yilmazkuday

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 27, 2018

Abstract

International trade studies have higher macro elasticity measures compared to international finance studies, which has evoked mixed policy implications regarding the effects of a change in trade costs versus exchange rates on welfare measures. This so-called international elasticity puzzle is investigated in this paper by drawing attention to the alternative strategies that the two literatures use for the aggregation of foreign products in consumer utility functions. Using the implications of having a finite number of foreign countries in nested CES frameworks that are consistent with the two literatures, the discrepancy between the elasticity measures is explained by showing theoretically and confirming empirically that the macro elasticity in international trade is a weighted average of the macro elasticity in international finance and the corresponding elasticity of substitution across products of foreign source countries.

Keywords: International Elasticity Puzzle, International Trade, International Finance

JEL Classification: F12, F14, F41

Suggested Citation

Yilmazkuday, Hakan, Understanding the International Elasticity Puzzle (November 27, 2018). Available at SSRN: https://ssrn.com/abstract=2847314 or http://dx.doi.org/10.2139/ssrn.2847314

Hakan Yilmazkuday (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

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