QUEST II. A Multi-Country Business Cycle and Growth Model



Table 5: Price elasticities of imports and exports

Imports

Exports

short run______

long run*______

short run______

long run*______

BL

0.23

1.00

0.18

1.00

DK

0.17

1.00

0.25

1.00

DE

0.22

1.00

0.23

1.00

GR

0.51

1.00

0.92

1.00

ES

0.26

1.00

0.21

1.00

FR

0.21

1.00

0.27

1.00

IR

0.15

1.00

0.28

1.00

IT

0.12

1.00

0.25

1.00

NL

0.24

1.00

0.16

1.00

OS

0.24

1.00

0.28

1.00

PO

0.21

1.00

0.54

1.00

SF

0.24

1.00

0.16

1.00

SW

0.22

1.00

0.14

1.00

UK

0.23

1.00

0.34

1.00

US

0.18

1.00

0.30

1.00

JA____________

0.19________

1.00________

0.40________

1.00________

Note:    * Long-run price elasticities have been restricted to 1.0. Unrestricted estimates over the period

1970-1994 ranged from 0.7 to 1.5 for imports and from 0.7 to 1.8 for exports.

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Asset markets are assumed to be fully integrated across all the industrialised regions
covered in the model, i.e.. there is full capital mobility. Exchange rates between European
currencies, US Dollar, Yen and a composite of the remaining OECD countries are fully
flexible. In standard setting, nominal exchange rates within the European Union are fixed in
nominal terms. The exchange rate of country j is determined endogenously according to the
following (uncovered) interest arbitrage relation with respect to the dollar

L{ = L“s + ∆E++1 / Eiy + 535E0it                                       (32)

The second term on the right hand side denotes the expected depreciation of country j’s
currency vis-a-vis the US dollar. The risk premium (RPREM) is assumed to be exogenous.

20



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