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Parameter Estimation and Measures of Fit in A Global, General Equilibrium Model

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  • Liu, Jing

    ()
    (Household Credit Services)

  • Arndt, Channing

    ()
    (Purdue University)

Abstract

Computable General Equilibrium (CGE) models have been widely used for quantitative analysis of global economic issues. However, CGE models are frequently criticized for resting on weak empirical foundations. This paper builds on recent work in macro-econometric estimation, developing an approach to parameter estimation for a widely employed global CGE model, the Global Trade Analysis Project (GTAP) model. An approximate likelihood function is developed and the set of optimum elasticity values is obtained by maximizing this approximate likelihood function in the context of a back casting exercise. In addition, two statistical tests are performed. The first of these tests compares the standard GTAP elasticity vector with the estimated trade elasticity vector. It rejects the null hypothesis of equality between the two sets of trade elasticities. The second test examines the widely maintained hypothesis known as the “rule of two”, by which the elasticity of substitution across imports by sources is set equal to twice the elasticity of substitution between domestic goods and imports. We fail to reject this common rule of thumb. We conclude that there is much to be gained by nesting CGE models within an estimation framework as this opens the way for formal evaluation of model performance and parameterization.

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Bibliographic Info

Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 19 (2004)
Issue (Month): ()
Pages: 626-649

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Handle: RePEc:ris:integr:0302

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Web page: http://econo.sejong.ac.kr/
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Related research

Keywords: CGE models; estimation; validation; trade elasticities;

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Cited by:
  1. Thomas Hertel & David Hummels & Maros Ivanic & Roman Keeney, 2004. "How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements?," NBER Working Papers 10477, National Bureau of Economic Research, Inc.
  2. Edward J. Balistreri & Christine A. McDaniel & Eina Vivian Wong, 2003. "An Estimation of U.S. Industry-Level Capital-Labor Substitution," Computational Economics 0303001, EconWPA.
  3. Joern Rattsoe & Hildegunn Ekroll Stokke, 2009. "Wage inequality, comparative advantage and skill biased technical change in South Africa," Working Paper Series 9909, Department of Economics, Norwegian University of Science and Technology.
  4. Christine A. McDaniel & Edward J. Balistreri, 2003. "A Discussion on Armington Trade Substitution Elasticities," Computational Economics 0303002, EconWPA.
  5. Hertel, Thomas W. & Keeney, Roman & Valenzuela, Ernesto, 2004. "Global Analysis Of Agricultural Trade Liberalization: Assessing Model Validity," 2004 Annual meeting, August 1-4, Denver, CO 20199, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Hertel, Thomas, 2013. "Global Applied General Equilibrium Analysis Using the Global Trade Analysis Project Framework," Handbook of Computable General Equilibrium Modeling, Elsevier.
  7. Pratt, Stephen & Blake, Adam & Swann, Peter, 2013. "Dynamic general equilibrium model with uncertainty: Uncertainty regarding the future path of the economy," Economic Modelling, Elsevier, vol. 32(C), pages 429-439.
  8. Joshua Elliott & Meredith Franklin & Ian Foster & Todd Munson & Margaret Loudermilk, 2012. "Propagation of Data Error and Parametric Sensitivity in Computable General Equilibrium Models," Computational Economics, Society for Computational Economics, vol. 39(3), pages 219-241, March.
  9. Ben Hammouda, Hakim & Osakwe, Patrick N., 2006. "Global Trade Models and Economic Policy Analyses: Relevance, Risks and Repercussions for Africa," MPRA Paper 1851, University Library of Munich, Germany.
  10. Christophe Heyndrickx & Natalia Tourdyeva & Victoria Alexeeva-Talebi, 2011. "The SUSTRUS model: a CGE model on regional level for sustainability policies in Russia," ERSA conference papers ersa11p1565, European Regional Science Association.
  11. Willenbockel, Dirk & Robinson, Sherman, 2009. "The global financial crisis, LDC exports and welfare: analysis with a world trade model," MPRA Paper 15376, University Library of Munich, Germany.
  12. Gustavo HERNÁNDEZ, 2013. "Una reseña de los efectos del Tratado de Libre Comercio entre Colombia y Estados Unidos," ARCHIVOS DE ECONOMÍA 011204, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  13. Thaiprasert, Nalitra, 2006. "Rethinking the Role of Agriculture and Agro-Industry in the Economic Development of Thailand: Input-Output and CGE Analyses (Ph.D. Dissertation)," MPRA Paper 1089, University Library of Munich, Germany.
  14. Waschik, Robert, 2009. "The effects of free trade areas on non-members: Modelling Kemp-Vanek admissibility," Journal of Policy Modeling, Elsevier, vol. 31(5), pages 648-663, September.
  15. Mark Partridge & Dan Rickman, 2010. "Computable General Equilibrium (CGE) Modelling for Regional Economic Development Analysis," Regional Studies, Taylor & Francis Journals, vol. 44(10), pages 1311-1328.
  16. Willenbockel, Dirk, 2009. "From overhang to hangover: consequences of protectionist responses to the global crisis for low-income countries," MPRA Paper 16100, University Library of Munich, Germany.

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