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How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements?

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Author Info
Thomas Hertel
David Hummels
Maros Ivanic
Roman Keeney

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Abstract

Computable General Equilibrium models, widely used for the analysis of Free Trade Agreements (FTAs) are often criticized for having poor econometric foundations. This paper improves the linkage between econometric estimates of key parameters and their usage in CGE analysis in order to better evaluate the likely outcome of a FTA for the Americas. Our econometric work focuses on estimation of the elasticity of substitution among imports from different countries, which is especially critical for evaluating the positive and normative outcomes of FTAs. We match the data in the econometric exercise to the policy experiment at hand. Then we sample from the distribution of parameter values given by our econometric estimates in order to generate a distribution of model results, from which we can construct confidence intervals. We conclude that there is great potential for combining econometric work with CGE-based policy analysis in order to produce a richer set of results that are likely to prove more satisfying to the sophisticated policy maker.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10477.

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Date of creation: May 2004
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Handle: RePEc:nbr:nberwo:10477

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models

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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. Pagan, A R & Shannon, J H, 1987. "How Reliable Are ORAN I Conclusions?," The Economic Record, The Economic Society of Australia, vol. 63(180), pages 33-45, March.
  2. McKitrick, Ross R., 1998. "The econometric critique of computable general equilibrium modeling: the role of functional forms," Economic Modelling, Elsevier, vol. 15(4), pages 543-573, October. [Downloadable!] (restricted)
  3. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204.
  4. Chris M. Alaouze, 1977. "Estimates of the elasticity of substitution between imported and domestically produced goods classified at the input-output level of aggregation," Centre of Policy Studies/IMPACT Centre Working Papers o-13, Monash University, Centre of Policy Studies/IMPACT Centre. [Downloadable!]
  5. DeVuyst, Eric A. & Preckel, Paul V., 1997. "Sensitivity analysis revisited: A quadrature-based approach," Journal of Policy Modeling, Elsevier, vol. 19(2), pages 175-185, April. [Downloadable!] (restricted)
  6. Chris M. Alaouze & John S. Marsden & John Zeitsch, 1977. "Estimates of the Elasticity of Substitution Between Imported and Domestically Produced Commodities at the Four Digit ASIC Level," Centre of Policy Studies/IMPACT Centre Working Papers o-11, Monash University, Centre of Policy Studies/IMPACT Centre. [Downloadable!]
  7. McDougall, Robert, 2000. "A New Regional Household Demand System for GTAP," GTAP Working Papers 404, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University. [Downloadable!]
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  8. Malcolm, Gerard, 1998. "Adjusting Tax Rates in the GTAP Data Base," GTAP Technical Papers 315, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University. [Downloadable!]
  9. Wigle, Randall M, 1991. "The Pagan-Shannon Approximation: Unconditional Systematic Sensitivity in Minutes," Empirical Economics, Springer, vol. 16(1), pages 35-49.
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