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Abstract:

cover
CEP Discussion Paper
International Trade Without CES: Estimating Translog Gravity
Dennis Novy
December 2010
Paper No' CEPDP1031:
Full Paper (pdf)

JEL Classification: F11; F12; F15


Tags: translog; gravity; trade costs; distance; trade cost elasticity

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and 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.