Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/38920
Authors: 
Novy, Dennis
Year of Publication: 
2010
Series/Report no.: 
CESifo working paper Trade Policy 3008
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.
Subjects: 
translog
trade costs
gravity
currency union
monopolistic competition
trade cost elasticity
heterogeneity
zero trade
JEL: 
F11
F12
F15
Document Type: 
Working Paper

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