The International Elasticity Puzzle Is Worse Than You Think

The Institute of Economics will hold the next meeting of its Seminar Series on Tuesday, February 14, 2016: Lionel Fontagné, from University Paris 1 Panthéon-Sorbonne and Paris School of Economics, will present the paper "The International Elasticity Puzzle Is Worse Than You Think".

Abstract:

We estimate three international price elasticities using exporters data: the elasticity of firm exports to export price, tariffs and real exchange rate shocks. In standard trade and international macroeconomics models these three elasticities should be equal. We find that this is far from being the case. We use French firm level electricity costs to instrument for export prices and provide a first estimate of the elasticity of firm-level exports to export prices. The elasticity of exports is highest, around 5, for export prices followed by tariffs, around 2, and is lowest for the real exchange rate, around 0.6. Because of the large discrepancy between these elasticites, we conclude that the international elasticity puzzle is actually worse than previously thought. Moreover, we  find that exporters decrease their price when foreign demand (GDP) or tariffs increase and following an exchange rate appreciation. This implies that not taking into account explicitly firms export prices biases estimates of export elasticities to tariffs, exchange rates and demand shocks.