Comments on "Estimation of the Value-Added/Intermediate Input Substitution Consistent with the GTAP Data"

The first part of the paper written by Ivanic et al. (2023) (hereafter IBN) offers new estimates of the substitution elasticities between inputs for many industries. IBN develop an original econometric framework that solely relies on the GTAP (Global Trade Analysis Project) databases, which lack data on input prices. IBN find, first, that the short run elasticities are often statistically different from zero and of the correct sign; second, that the long-run elasticities are larger than their short-run counterparts. Our comment identifies three concerns with their econometric procedures and results. First, IBN do not acknowledge the Constant Return to Scale (CRS) assumption of the Constant Elasticity of Substitution (CES) function. Second, IBN’s statistical inference fails to correct the p-value problems associated with large samples. Third, the dynamic specification developed by IBN, where decisions are a function of price changes and not price levels, lacks theoretical justifications. We propose simple remedies to these three issues and, in some cases, find that many elasticity estimates are no longer statistically different from zero or of the correct sign. Moreover, we do not find different levels of significance between short- and long-run elasticities.