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

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 data to fit the model exactly. We use this premise to evaluate the 'fit' of a standard multi-country computable general equilibrium (CGE) 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 percent 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.

Keywords: calibration as estimation, computable general equilibrium, parameterization

JEL Classification: C68, F17