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Methodological shortcomings in estimating Armington elasticities

Cassoni, Adriana and Flores, Manuel (2008): Methodological shortcomings in estimating Armington elasticities.

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Abstract

CGEMs are one of the most potentially powerful tools for simulating policies. However, a major restriction they face is them needing a huge number of parameters that are not always available, and even at times impossible to obtain. When CGEMs are applied to trade, Armington elasticities of substitution are one of those key sets. The common practice among CGEMs builders has been to impose these values, either at will or by using those stemming from other existing research. There is general consensus, however, that econometrically estimated parameters for each case study would substantially improve the robustness of results. Unfortunately, most of the so obtained elasticities are considered underestimates of both the real and theoretically expected parameters. This gave rise to a growing concern on the eventual role played by methodological and empirical issues in this matter. There are some findings that have generated a quite general consensus among researchers, related to the type of datasets used; the disaggregation levels at which goods are defined and the origins of imported varieties are considered; the frequency of data; among others.

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