Testing dynamic specification for import demand models: the case of cotton

Error correction models impose few prior restrictions on dynamic model specification and allow the data to determine model structure. Despite this obvious advantage, few applications have adopted the error correction model to explain trade flows. An error correction model of cotton import demand is estimated for France, Japan, and HongKong. A variety of tests are applied to determine the dynamic structure of the model. It is found that the most general models are those that best fit the data for cotton import demand. Long-run elasticities from these general models are significantly different than elasticities derived from a comparable static model.