Structural Estimation and Solution of International Trade Models with Heterogeneous Firms

CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 08/89

42 Pages Posted: 1 Jul 2008

See all articles by Edward J. Balistreri

Edward J. Balistreri

Iowa State University

Russell H. Hillberry

University of Melbourne - Department of Economics; World Bank - Development Research Group (DECRG)

Thomas F. Rutherford

Centre for Energy Policy and Economics

Date Written: June 2008

Abstract

We present an empirical implementation of a general-equilibrium model of international trade with heterogeneous manufacturing firms. The theory underlying our model is consistent with Melitz (2003). A nonlinear structural estimation procedure identifies a set of core parameters and unobserved firm-level trade frictions that best fit the geographic pattern of trade. Once the parameters are identified, we utilize a decomposition technique for computing general-equilibrium counterfactuals. We illustrate this technique using trade and protection data from the Global Trade Analysis Project (GTAP). We first assess the economic effects of reductions in measured tariffs. Taking the simple-average welfare change across regions the Melitz structure indicates welfare gains from liberalization that are nearly four times larger than in a standard policy simulation model. Furthermore, when we compare the economic impact of tariffs with reductions in estimated fixed trade costs we find that policy measures affecting the fixed costs of firmentry are of greater importance than conventional tariff barriers.

JEL Classification: C68, F12

Suggested Citation

Balistreri, Edward J. and Hillberry, Russell H. and Rutherford, Thomas F., Structural Estimation and Solution of International Trade Models with Heterogeneous Firms (June 2008). CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 08/89, Available at SSRN: https://ssrn.com/abstract=1153944 or http://dx.doi.org/10.2139/ssrn.1153944

Edward J. Balistreri (Contact Author)

Iowa State University ( email )

260 Heady Hall
Ames, IA 50011
United States
3032531674 (Phone)

Russell H. Hillberry

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Thomas F. Rutherford

Centre for Energy Policy and Economics ( email )

ETH-Zentrum
Zurich, CH-8092
United States
+41 (0)44/632 6359 (Phone)
+41 (0)44/632 1622 (Fax)

HOME PAGE: http://www.cepe.ethz.ch/

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