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An evaluation of the performance of applied general equilibrium models of the impact of NAFTA

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Timothy J. Kehoe

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Abstract

This paper evaluates the performances of three of the most prominent multisectoral static applied general equilibrium models used to predict the impact of the North American Free Trade Agreement. These models drastically underestimated the impact of NAFTA on North American trade. Furthermore, the models failed to capture much of the relative impacts on different sectors. Ex-post performance evaluations of applied GE models are essential if policymakers are to have confidence in the results produced by these models. Such valuations also help make applied GE analysis a scientific discipline in which there are well-defined puzzles with clear successes and failures for competing theories. Analyzing sectoral trade data indicates the need for a new theoretical mechanism that generates large increases in trade in product categories with little or no previous trade. To capture changes in macroeconomic aggregates, the models need to be able to capture changes in productivity.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 320.

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Date of creation: 2003
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Handle: RePEc:fip:fedmsr:320

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Keywords: North American Free Trade Agreement

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kehoe, Timothy J. & Noyola, Pedro Javier & Manresa, Antonio & Polo, Clemente & Sancho, Ferran, 1988. "A general equilibrium analysis of the 1986 tax reform in Spain," European Economic Review, Elsevier, vol. 32(2-3), pages 334-342, March. [Downloadable!] (restricted)
  2. Brown, D.K., 1993. "Properties of Applied General Equilibrium Trade Models with Monopolistic Competition and Foreign Direct Investment," Working Papers 321, Research Seminar in International Economics, University of Michigan.
  3. Shoven, John B & Whalley, John, 1973. "General Equilibrium with Taxes: A Computational Procedure and an Existence Proof," Review of Economic Studies, Blackwell Publishing, vol. 40(4), pages 475-89, October. [Downloadable!] (restricted)
  4. Timothy J. Kehoe & Edward C. Prescott, 2002. "Great Depressions of the Twentieth Century," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 1-18, January. [Downloadable!] (restricted)
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  5. Mary E. Burfisher & Sherman Robinson & Karen Thierfelder, 2001. "The Impact of NAFTA on the United States," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 125-144, Winter. [Downloadable!] (restricted)
  6. Herbert E. Scarf, 1967. "On the Computation of Equilibrium Prices," Cowles Foundation Discussion Papers 232, Cowles Foundation, Yale University. [Downloadable!]
  7. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December. [Downloadable!] (restricted)
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  8. de Cordoba, Gonzalo Fernandez & Kehoe, Timothy J., 2000. "Capital flows and real exchange rate fluctuations following Spain's entry into the European Community," Journal of International Economics, Elsevier, vol. 51(1), pages 49-78, June. [Downloadable!] (restricted)
  9. Harris, Richard, 1984. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," American Economic Review, American Economic Association, vol. 74(5), pages 1016-32, December. [Downloadable!] (restricted)
  10. Daniel Trefler, 2001. "The Long and Short of the Canada-U.S. Free Trade Agreement," NBER Working Papers 8293, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Timothy J. Kehoe, 1992. "Modeling the dynamic impact of North American free trade," Working Papers 491, Federal Reserve Bank of Minneapolis. [Downloadable!]
  12. Adams, Philip D. & Dixon, Peter B. & McDonald, Daina & Meagher, G. A. & Parmenter, Brian R., 1994. "Forecasts for the Australian economy using the MONASH model," International Journal of Forecasting, Elsevier, vol. 10(4), pages 557-571, December. [Downloadable!] (restricted)
  13. Cox, David & Harris, Richard, 1985. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 115-45, February. [Downloadable!] (restricted)
  14. Kehoe, Timothy J & Polo, Clemente & Sancho, Ferran, 1995. "An Evaluation of the Performance of an Applied General Equilibrium Model of the Spanish Economy," Economic Theory, Springer, vol. 6(1), pages 115-41, June.
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  15. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  16. Timothy J. Kehoe & Kim J. Ruhl, 2003. "How important is the new goods margin in international trade?," Staff Report 324, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  17. Raphael Bergoeing & Timothy J. Kehoe, 2001. "Trade Theory and Trade Facts," Documentos de Trabajo 109, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
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  18. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November. [Downloadable!] (restricted)
  19. Brown, D.K. & Stern, R.M., 1988. "Computable General Equilibrium Estimates Of The Gains From U.S.-Canadian Trade Liberalization," Working Papers 220, Research Seminar in International Economics, University of Michigan.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bussolo, Maurizio & Niimi, Yoko, 2006. "Do regional trade pacts benefit the poor ? An illustration from the Dominican Republic-Central American Free Trade Agreement in Nicaragua," Policy Research Working Paper Series 3850, The World Bank. [Downloadable!]
  2. Konan, Denise Eby & Maskus, Keith E., 2003. "Quantifying the impact of services liberalization in a developing country," Policy Research Working Paper Series 3193, The World Bank. [Downloadable!]
    Other versions:
  3. Arvind Panagariya, 2004. "India’s Trade Reform: Progress, Impact and Future Strategy:," International Trade 0403004, EconWPA. [Downloadable!]
  4. Timothy J. Kehoe & Kim J. Ruhl, 2003. "How important is the new goods margin in international trade?," Staff Report 324, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
    Other versions:
  6. Paul R. Bergin & Reuven Glick, 2005. "Tradability, Productivity, and Understanding International Economic Integration," NBER Working Papers 11637, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Ahmed, Vaqar & O' Donoghue, Cathal, 2007. "CGE-Microsimulation Modelling: A Survey," MPRA Paper 9307, University Library of Munich, Germany. [Downloadable!]
  8. Fernando Alvarez & Robert E. Lucas, 2005. "General Equilibrium Analysis of the Eaton-Kortum Model of International Trade," NBER Working Papers 11764, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Sang-Wook Stanley Cho & Julian P. Diaz, 2007. "Trade Liberalization in Latin America and Eastern Europe: The Cases of Ecuador and Slovenia," Discussion Papers 2007-25, School of Economics, The University of New South Wales. [Downloadable!]
  10. Hertel, Thomas W. & Winters, L. Alan, 2005. "Poverty impacts of a WTO agreement : synthesis and overview," Policy Research Working Paper Series 3757, The World Bank. [Downloadable!]
  11. Riccardo Magnani & Jean Mercenier, 2007. "On linking microsimulation and applied GE by exact aggregation of heterogeneous discrete-choice making agents," THEMA Working Papers 2007-06, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
  12. Erling Holmøy, 2006. "Real appreciation as an automatic channel for redistribution of increased government non-tax revenue," Discussion Papers 471, Research Department of Statistics Norway. [Downloadable!]
  13. Torstein Bye, Erling Holmøy and Kim Massey Heide, 2006. "Removing policy based comparative advantage for energy intensive production. Necessary adjustments of the real exchange rate and industry structure," Discussion Papers 462, Research Department of Statistics Norway. [Downloadable!]
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