Home » Volume 23 / 2019 » Issue 4 »
Export Demand Elasticity Estimation for U.S. Cotton
Bing Liu and Darren Hudson
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U.S. cotton exports have been characterized by large fluctuations in the last two decades. However, the latest available elasticity estimates of U.S. cotton exports are from 1982. New and more precise estimates of export demand elasticities for U.S. cotton are necessary to forecast future U.S. cotton exports and accurately analyze potential political policy and market changes. This study provides updated estimates of the elasticity of foreign demand for U.S. cotton in selected major cotton importing countries using an Armington framework for the years 1978 to 2017. Additionally, this study examines the evolution of the export demand elasticities over time in a dynamic framework of time-varying parameters (TVP) based on the Kalman filter methodology. Our results indicate that short-run price elasticities of foreign demand for U.S. cotton are price inelastic for major cotton importing countries, except for Pakistan. Countries with lower export demand elasticities are associated with relatively large U.S. cotton market shares for these countries. The import demand elasticity for U.S. cotton in recent years is becoming less elastic, implying that cotton import demand in major importing countries has become less price sensitive than it was historically, and the U.S. has competitive advantages in these major cotton importing countries over other suppliers.