Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271820 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 10176
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
short vs. long run
gravity estimation
trade elasticity
JEL: 
F13
F14
F16
Document Type: 
Working Paper
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