How do we measure trade elasticity for services?

This paper presents our attempt at identifying trade elasticities through variations in the exchange rate for possible applications to the case of services whose physical transactions are veiled in trade statistics. The regression analysis used to estimate elasticity entails a situation where the explanatory variable is leaked into the error term through the latent supply equation, causing an endogeneity problem for which an instrumental variable cannot be found. Our identification strategy is to utilize the normalizing condition, which enables the supply parameter to be identified, along with the reduced-form equation of the system of demand and supply equations. We evaluate the performance of the method proposed by applying it to several different tangible goods whose benchmark trade elasticities are estimable by utilizing information on their physical transactions.