Short and Long Run Armington Elasticities for the Mexican Economy

Abstract

The Armington elasticity is a key element in models with trade flows, either in International Real Business Cycle (IRBC) models or in computable general equilibrium models. In this paper, Armington elasticities at the aggregate level are estimated for Mexico for the 1993–2013 period. The composite good, formed by domestic and imported goods, is defined by means of an aggregate social accounting matrix for Mexico. This composite good is modeled through of a constant elasticity of substitution function. The relative demand for imports to domestic goods is obtained as a function of their relative prices. The two variables of the model, the logarithm of the relative demand for imports to domestic goods and of their relative prices, are integrated of order one and cointegrated. Therefore, an error correction model is used in order to obtain short and long run elasticities. Thus, short and long run elasticities are 0.534 and 0.719, respectively. The estimated elasticities are consistent with those used in IRBC models, which are relatively small elasticities. Also, long run elasticity is higher than short run elasticity, as presented in the literature.