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

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  • Liu, Jing
  • Channing Arndt
  • Thomas Hertel

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

Paper provided by Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University in its series GTAP Working Papers with number 1200.

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Date of creation: 2003
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Handle: RePEc:gta:workpp:1200

Note: GTAP Working Paper No. 24
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Cited by:
  1. 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, Society for Computational Economics, vol. 39(3), pages 219-241, March.
  2. Pratt, Stephen & Blake, Adam & Swann, Peter, 2013. "Dynamic general equilibrium model with uncertainty: Uncertainty regarding the future path of the economy," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 429-439.
  3. Hertel, Thomas, 2013. "Global Applied General Equilibrium Analysis Using the Global Trade Analysis Project Framework," Handbook of Computable General Equilibrium Modeling, Elsevier, Elsevier.
  4. 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.
  5. Hakim Ben Hammouda & Patrick N. Osakwe, 2008. "Global Trade Models and Economic Policy Analyses: Relevance, Risks and Repercussions for Africa," Development Policy Review, Overseas Development Institute, Overseas Development Institute, vol. 26(2), pages 151-170, 03.
  6. Edward J. Balistreri & Christine A. McDaniel & Eina Vivian Wong, 2003. "An Estimation of U.S. Industry-Level Capital-Labor Substitution," Computational Economics, EconWPA 0303001, EconWPA.
  7. 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, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 20199, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Joern Rattsoe & Hildegunn Ekroll Stokke, 2009. "Wage inequality, comparative advantage and skill biased technical change in South Africa," Working Paper Series, Department of Economics, Norwegian University of Science and Technology 9909, Department of Economics, Norwegian University of Science and Technology.
  9. Waschik, Robert, 2009. "The effects of free trade areas on non-members: Modelling Kemp-Vanek admissibility," Journal of Policy Modeling, Elsevier, Elsevier, vol. 31(5), pages 648-663, September.
  10. Christophe Heyndrickx & Natalia Tourdyeva & Victoria Alexeeva-Talebi, 2011. "The SUSTRUS model: a CGE model on regional level for sustainability policies in Russia," EcoMod2011, EcoMod 3144, EcoMod.
  11. McDaniel, Christine A. & Balistreri, Edward J., 2002. "A Discussion on Armington Trade Substitution Elasticities," Working Papers, United States International Trade Commission, Office of Economics 15856, United States International Trade Commission, Office of Economics.
  12. Gustavo HERNÁNDEZ, 2013. "Una reseña de los efectos del Tratado de Libre Comercio entre Colombia y Estados Unidos," ARCHIVOS DE ECONOMÍA, DEPARTAMENTO NACIONAL DE PLANEACIÓN 011204, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  13. Mark Partridge & Dan Rickman, 2010. "Computable General Equilibrium (CGE) Modelling for Regional Economic Development Analysis," Regional Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 44(10), pages 1311-1328.
  14. 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.
  15. 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.
  16. 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.

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