Econometric estimation of Armington import elasticities and their system-wide impact in a regional CGE model of the Illinois economy

One of the main concerns associated with the development and use of regional CGE models is the determination of key parameter values, particularly substitution and other price elasticities. A common problem is the lack of appropriate regional data for econometric estimation. Consequently, it is important to identify key parameters that are likely to be important in determining quantitative results and then to prioritize these for estimation where appropriate data are available. In this paper, the focus is on the estimation of the regional trade (import) substitution parameters, which tend to be important in analysis for regional economies (given their openness to trade). Here, commodity import elasticities for the Illinois economy are estimated and tested in a single region CGE model of the Illinois economy. In our econometric estimation, we apply a model that takes account of market size and distance in estimating the substitutability between commodities produced in Illinois and other US states.