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Estimating Gravity from the Short to the Long Run: A Simple Solution to the ‘International Elasticity Puzzle’

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  • James E. Anderson
  • Yoto V. Yotov

Abstract

We propose a simple and flexible reduced-form econometric approach to estimate gravity models in the short and the long run. The theoretical lens for interpreting our methods amends the canonical Lucas-Prescott adjustment formulation to allow for time-interval-varying depreciation-cum-adjustment. A time-varying trade elasticity in the structural gravity model is implied. Our methods explain the ‘international elasticity puzzle,’ the discrepancy between trade elasticity estimates from the trade literature and the international real business cycle literature. The same theory-motivated estimating equation applied to the same data generates a distribution of trade elasticity estimates that vary from 0.4 in the short run to 4.8 in the long run. The results offer support for some existing theories of dynamic adjustment in trade costs and imply that the long-run equilibrium in our sample is reached in about 16 to 17 years.

Suggested Citation

  • James E. Anderson & Yoto V. Yotov, 2022. "Estimating Gravity from the Short to the Long Run: A Simple Solution to the ‘International Elasticity Puzzle’," CESifo Working Paper Series 10176, CESifo.
    • Handle: RePEc:ces:ceswps:_10176
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    References listed on IDEAS

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    1. Peter H. Egger & Mario Larch & Yoto V. Yotov, 2022. "Gravity Estimations with Interval Data: Revisiting the Impact of Free Trade Agreements," Economica, London School of Economics and Political Science, vol. 89(353), pages 44-61, January.
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    9. Baier, Scott L. & Yotov, Yoto V. & Zylkin, Thomas, 2019. "On the widely differing effects of free trade agreements: Lessons from twenty years of trade integration," Journal of International Economics, Elsevier, vol. 116(C), pages 206-226.
    10. Crucini, Mario J. & Davis, J. Scott, 2016. "Distribution capital and the short- and long-run import demand elasticity," Journal of International Economics, Elsevier, vol. 100(C), pages 203-219.
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    Cited by:

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    2. Chaban, Maxym, 2024. "Exchange rate dynamics and consumption of traded goods," Journal of Macroeconomics, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    short vs. long run; gravity estimation; trade elasticity;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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