Estimation of Armington elasticities in a CGE economy-energy-environment model for Europe

Abstract

The main goal of the article is to estimate Armington elasticities of the energy and energy-intensive sectors of the GEM-E3 computable general equilibrium model. The model follows the standard two-stage budget optimisation of the consumer by first optimising between domestically produced and imported goods and, then, by country of origin. A panel data econometric framework is used here with dynamic adjustment to capture both the long and short term elasticities for the studied six aggregated sectors in Europe. The estimated long-term elasticities are in line with the literature, but higher than those used in the GEM-E3 model. The results suggest that consumer choice appears to be more price sensitive between the domestic and the composite imported goods, and amongst the importers, than already assumed in the model.