Novy, Dennis (2010) International trade and monopolistic competition without CES : estimating translog gravity. Working Paper. Coventry: University of Warwick. Dept. of Economics. (Warwick economics research paper series (TWERPS), Vol.2010).

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Abstract

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and rich substitution patterns across goods. In contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country?s imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find strong empirical support in its favor. In an application to the currency union effect, I find that a currency union is only associated with substantially higher bilateral trade if the exporting country provides a small share of the destination country's imports. For other pairs, the currency union effect is modest or indistinguishable from zero.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HF Commerce
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	International trade -- Econometric models, Production functions (Economic theory), Monopolistic competition
Series Name:	Warwick economics research paper series (TWERPS)
Publisher:	University of Warwick. Dept. of Economics
Place of Publication:	Coventry
Date:	2010
Volume:	Vol.2010
Number:	No.929
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Economic and Social Research Council (Great Britain) (ESRC)
Grant number:	RES-000-22-3112 (ESRC)
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URI:	http://wrap.warwick.ac.uk/id/eprint/3531

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