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An Evaluation of the Performance of Applied General Equilibrium Models of the Impact of NAFTA

  • Timothy J. Kehoe

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 David K. Levine in its series Levine's Working Paper Archive with number 506439000000000525.

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Date of creation: 14 Mar 2003
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Handle: RePEc:cla:levarc:506439000000000525
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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  2. Raphael Bergoeing & Timothy J. Kehoe, 2001. "Trade Theory and Trade Facts," Documentos de Trabajo 109, Centro de Economía Aplicada, Universidad de Chile.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Brown, D.K. & Deardorff, A.V. & Stern, R.M., 1991. "A North American Free Trade Agreement: Analytical Issues and A Computational Assessment," Working Papers 289, Research Seminar in International Economics, University of Michigan.
  9. Daniel Trefler, 2004. "The Long and Short of the Canada-U. S. Free Trade Agreement," American Economic Review, American Economic Association, vol. 94(4), pages 870-895, September.
  10. Brown, D.K. & Deardorff, A.V. & Stern, R.M., 1991. "Some Estimates of a North American Free Trade Agreement," Working Papers 288, Research Seminar in International Economics, University of Michigan.
  11. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Timothy J. Kehoe & Kim J. Ruhl, 2013. "How Important Is the New Goods Margin in International Trade?," Journal of Political Economy, University of Chicago Press, vol. 121(2), pages 358 - 392.
  13. Timothy J. Kehoe, 1992. "Modeling the dynamic impact of North American free trade," Working Papers 491, Federal Reserve Bank of Minneapolis.
  14. 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.
  15. 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.
  16. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  17. 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.
  18. repec:oup:restud:v:40:y:1973:i:4:p:475-89 is not listed on IDEAS
  19. 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.
  20. 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.
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