Import Elasticity with Government Intervention: A Time Series Cross Section Analysis of Seventy-Two Countries

Abstract

The impact of government intervention on the behavior of a country's import market is investigated by focusing on the departure this intervention induces between excess and import demand functions. A formal model of government behavior is posited where government preferences are embodied in a country's import demand function. This function is related to its corresponding excess demand function through the domestic price to border price transmission elasticity. A pooled cross section data on 72 countries is used to estimate these function for wheat and rice. The results suggest that import demand elasticities are larger than their corresponding excess demand elasticities and that price transmission elasticities are less than unity. Differences in elasticities over time, regions and levels of nominal protection are also reported.