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Taste Parameters as Model Residuals: Assessing the "Fit" of an Armington Trade Model

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  • Russell H. Hillberry
  • Michael A. Anderson
  • Edward J. Balistreri
  • Alan K. Fox

Abstract

We note that calibration parameters in a multi-country Armington trade model play a role similar to that of econometric residuals: they allow the model to fit the data exactly. We use this premise to evaluate the "fit" of a standard multi-country computable general-equilibrium model. We find that the model relies heavily on these parameters to explain the pattern of trade. In 33 of the 46 commodity groups we assess, modeled economic behavior explains less than 20% of the variation in bilateral trade. In a calibration- as-estimation experiment, we estimate the commodity-specific elasticities of substitution consistent with a well-fitting model and find that they are substantially higher than widely accepted estimates. Copyright 2005 International Monetary Fund.

Suggested Citation

  • Russell H. Hillberry & Michael A. Anderson & Edward J. Balistreri & Alan K. Fox, 2005. "Taste Parameters as Model Residuals: Assessing the "Fit" of an Armington Trade Model," Review of International Economics, Wiley Blackwell, vol. 13(5), pages 973-984, November.
  • Handle: RePEc:bla:reviec:v:13:y:2005:i:5:p:973-984
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    References listed on IDEAS

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    1. Hertel, Thomas, 1997. "Global Trade Analysis: Modeling and applications," GTAP Books, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, number 7685.
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    Cited by:

    1. Yilmazkuday, Hakan, 2012. "Understanding interstate trade patterns," Journal of International Economics, Elsevier, vol. 86(1), pages 158-166.
    2. Mario Larch & Yoto V. Yotov, 2016. "General Equilibrium Trade Policy Analysis with Structural Gravity," CESifo Working Paper Series 6020, CESifo Group Munich.
    3. Whalley, John & Xin, Xian, 2009. "Home and regional biases and border effects in Armington type models," Economic Modelling, Elsevier, vol. 26(2), pages 309-319, March.
    4. Balistreri, Edward J. & Markusen, James R., 2009. "Sub-national differentiation and the role of the firm in optimal international pricing," Economic Modelling, Elsevier, vol. 26(1), pages 47-62, January.
    5. Welsch, Heinz, 2008. "Armington elasticities for energy policy modeling: Evidence from four European countries," Energy Economics, Elsevier, vol. 30(5), pages 2252-2264, September.
    6. repec:bla:reviec:v:25:y:2017:i:3:p:649-676 is not listed on IDEAS
    7. Hakan Yilmazkuday, 2017. "A Solution to the Missing Globalization Puzzle by Non-CES Preferences," Review of International Economics, Wiley Blackwell, vol. 25(3), pages 649-676, August.
    8. Bureau Jean-Christophe & Salvatici Luca, 2004. "WTO Negotiations on Market Access in Agriculture: a Comparison of Alternative Tariff Cut Proposals for the EU and the US," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-35, March.
    9. Yao, Guolin & Hillberry, Russell, 2018. "Structural Gravity Model Estimates of Nested CES Import Demands for Soybeans," 2018 Annual Meeting, August 5-7, Washington, D.C. 274281, Agricultural and Applied Economics Association.
    10. Hou, Yulin & Wang, Yun & Yilmazkuday, Hakan, 2017. "Gravity Channels in Trade," Globalization Institute Working Papers 297, Federal Reserve Bank of Dallas.

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