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Elasticity Optimism (IMIMB)
IMIMB is a study contract with the Banque de France, led by Jean Imbs (HEC Lausanne and CEPR) and Isabelle Méjean (Ecole Polytechnique)
The substitutability between domestic and foreign goods is central to plausible calibrations of external balances. Our understanding of the international diffusion of trade shocks, the dynamic response of trade balances to exogenous shocks or the resolution of global imbalances all rest crucially on this key preference parameter.
Imbs and Méjean propose to introduce a structural approach to estimating these aggregate elasticities. A structural estimation alleviates the endogeneity concerns that plague the more standard framework, based on regressions of quantities on prices. More to the point, it will also identify the true value of a crucial preference parameter, unbiased by aggregation concerns or unobserved changes in varieties. This unbiased estimate is what calibration exercises should use.
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