Academic journal article The European Journal of Comparative Economics

Price and Income Elasticities of Russian Exports

Academic journal article The European Journal of Comparative Economics

Price and Income Elasticities of Russian Exports

Article excerpt

Abstract

The paper gauges export demand elasticities for Russia using an Error Correction technique within a cointegration framework. An extended version of the Imperfect Substitutes Model has been implemented to estimate the sensitivity of Russian exports without oil components to price and to Russian and world income. Our results suggest a robust and negative long run cointegration relationship between the real effective exchange rate, defined as the weighted average of the rouble's exchange rates versus a basket of the three currencies with the largest share in the trade turnover adjusted to incorporate inflation rate differences (the ratio of the domestic price indices to the foreign price indices), and Russian exports. An increase in exports by 24% is caused by a real depreciation by 10%. Furthermore, a 10% growth in world income leads to a 33% rise in exports. Finally, exports drop by 14% whenever a 10% increase in domestic income occurs.

JEL Classification: C22, F19, P27

Keywords: Russia, export demand function, elasticities, cointegration.

1. Introduction

The aim of this paper is to evaluate the role played by income and prices in the determination of Russian exports. In particular, it will calculate to what extent changes in prices affect Russian exports and to what extent changes in foreign and Russian income impact on the demand for Russian products. Income and price elasticities are estimated within a Cointegration framework using the Error Correction Model (ECM) technique. It is important to estimate price and income elasticities because they can be applied to many relevant macro-economic policy issues: the effect of both monetary and fiscal policies and expenditure switching policies (such as exchange rate, subsidy and tariff policies) on a country's balance of payments, the impact of external balance restrictions on domestic policy measures, the international transmission of changes in economic activity and prices and the employment effects of changes in own or partner-countries' trade restraints.

Substantial empirical literature exists on the estimation of price and income elasticities in international trade, much of it focused on U.S and European trade. Most econometric estimations indicate that price elasticities fall in a range of 0 to -4.0, while income elasticities fall between 0.17 and 4.5. Since the values of price elasticities vary considerably, the recent literature questions the effectiveness of real devaluation in affecting exports and imports. According to Rose (1990, 1991) and Ostry and Rose (1992), a real depreciation does not impact significantly on the trade balance. Reinhart (1995), Senhadji and Montenegro (1998), Senhadji and Montenegro (1999) provide instead, strong support to the view that depreciations improve the trade balance. It seems that low econometric estimates of price elasticities are unreliable for the purpose of forecasting the effect of a depreciation, and there is a strong presumption that these elasticities lead to a considerable underestimation of its effectiveness.

The paper is divided into seven sections. Section 2 briefly reviews the trade modelling literature. Section 3 describes the imperfect substitute model. Section 4 specifies a model for Russia and provides an explanation of data employed. Section 5 shows the empirical analysis within a Cointegration framework. The main findings are presented in section 6. Section 7 concludes.

2. Trade Modelling

The behaviour of foreign trade flows has been subjected to many empirical investigations through the estimation of trade equations. The latter are equations for the time-series behaviour of the quantities and prices of imported and exported goods. Early estimations of income and price elasticities have been investigated and assessed by Prais (1962). Early world trade models are examined in Taplin (1973). Multi-country models have been gauged by Deardorff and Stern (1978). …

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