The Long and Short (Run) of Trade Elasticities: Nitya Pandalai-Nayar (UT Austin)

Abstract: We propose a novel approach to estimate the trade elasticity at various horizons. When coun-tries change Most Favored Nation (MFN) tariffs, partners that trade on MFN terms experienceplausibly exogenous tariff changes. The differential effects on imports from these countries rela-tive to a control group – countries not subject to the MFN tariff scheme – can be used to identifythe trade elasticity. We build a panel dataset combining information on product-level tariffs andtrade flows covering 1995-2018, and estimate the trade elasticity at short and long horizons usinglocal projections (Jordà,2005). Our main findings are that the elasticity of tariff-exclusive tradeflows in the year following the exogenous tariff change is about−0.76, and the long-run elasticityranges from−1.75 to−2.25. Our long-run estimates are smaller than typical in the literature,and it takes 7-10 years to converge to the long run, implying that (i) the welfare gains from tradeare high and (ii) there are substantial convexities in the costs of adjusting export participation.

Please contact Kirill Borusyak at k.borusyak@ucl.ac.uk for the seminar link.