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The Gains from Trade with Monopolistic Competition: Specification, Estimation, and Mis-Specification

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Huiwen Lai
Daniel Trefler

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Abstract

The difficulty of incorporating general equilibrium price effects into econometric estimating equations has deterred most researchers from econometrically estimating the welfare gains from trade liberalization. Using a paired-down CES monopolistic competition example, we show that this difficulty has been greatly exaggerated. Along the way, we estimate indeed precisely estimate large welfare gains from trade liberalization as measured by compensating variation. Unlike calibration methods, econometric methods allow researchers to isolate the violence done by the model to the data. We find that the CES monopolistic competition model horribly mis-specifies behavioural price elasticities and general equilibrium price feedbacks. The model as conceived is therefore of limited value for analysing the effects of trade liberalization. We report a number of specification issues that should point the way to better theoretical modeling.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9169.

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Date of creation: Sep 2002
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Handle: RePEc:nbr:nberwo:9169

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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  3. Mary Amiti & John Romalis, 2007. "Will the Doha Round Lead to Preference Erosion?," NBER Working Papers 12971, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Behrens, Kristian & Gaigné, Carl & Ottaviano, Gianmarco Ireo Paolo & Thisse, Jacques-François, 2003. "Inter-regional and International Trade: Seventy Years After Ohlin," CEPR Discussion Papers 4065, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Davin Chor, 2006. "Unpacking Sources of Comparative Advantage: A Quantitative Approach," Working Papers 13-2008, Singapore Management University, School of Economics, revised Oct 2008. [Downloadable!]
  6. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Charles Engel & Jian Wang, 2008. "International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities," NBER Working Papers 13814, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Enrique Martinez-Garcia & Jens Søndergaard, 2008. "The real exchange rate in sticky price models: does investment matter?," Globalization and Monetary Policy Institute Working Paper 17, Federal Reserve Bank of Dallas. [Downloadable!]
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  9. Combes, Pierre-Philippe & Lafourcade, Miren & Mayer, Thierry, 2003. "Can Business and Social Networks Explain the Border Effect Puzzle?," CEPR Discussion Papers 3750, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Lionel Fontagne & Thierry Mayer & Soledad Zignago, 2004. "Trade in the Triad: How Easy is the Access to Large Markets?," Working Papers 2004-04, CEPII research center. [Downloadable!]
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  11. Takatoshi Tabuchi & Kristian Behrens & Andrea R. Lamorgese, 2004. "Testing the Home Market Effects in a Multi-country World: The Theory," Econometric Society 2004 Far Eastern Meetings 595, Econometric Society. [Downloadable!]
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  12. Charles Engel & Jian Wang, 2007. "International trade in durable goods: understanding volatility, cyclicality, and elastics," Globalization and Monetary Policy Institute Working Paper 03, Federal Reserve Bank of Dallas. [Downloadable!]
  13. Nathan Nunn & Daniel Trefler, 2006. "Putting the Lid on Lobbying: Tariff Structure and Long-Term Growth when Protection is for Sale," NBER Working Papers 12164, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Head, Charles Keith & Mayer, Thierry, 2003. "The Empirics of Agglomeration and Trade," CEPR Discussion Papers 3985, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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