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How Confident Can We Be in Cge-Based Assessments of Free Trade Agreements?

41 Pages Posted: 23 May 2004 Last revised: 19 Aug 2010

Thomas W. Hertel

Purdue University - Center for Global Trade Analysis; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

David L. Hummels

Purdue University - Department of Economics; National Bureau of Economic Research (NBER)

Maros Ivanic

World Bank; World Bank - Development Economics Group (DEC); World Bank - Development Research Group (DECRG)

Roman Keeney

Purdue University

Date Written: May 2004

Abstract

Computable General Equilibrium models, widely used for the analysis of Free Trade Agreements (FTAs) are often criticized for having poor econometric foundations. This paper improves the linkage between econometric estimates of key parameters and their usage in CGE analysis in order to better evaluate the likely outcome of a FTA for the Americas. Our econometric work focuses on estimation of the elasticity of substitution among imports from different countries, which is especially critical for evaluating the positive and normative outcomes of FTAs. We match the data in the econometric exercise to the policy experiment at hand. Then we sample from the distribution of parameter values given by our econometric estimates in order to generate a distribution of model results, from which we can construct confidence intervals. We conclude that there is great potential for combining econometric work with CGE-based policy analysis in order to produce a richer set of results that are likely to prove more satisfying to the sophisticated policy maker.

Suggested Citation

Hertel, Thomas W. and Hummels, David L. and Ivanic, Maros and Keeney, Roman, How Confident Can We Be in Cge-Based Assessments of Free Trade Agreements? (May 2004). NBER Working Paper No. w10477. Available at SSRN: https://ssrn.com/abstract=541702

Thomas W. Hertel

Purdue University - Center for Global Trade Analysis ( email )

Department of Agricultural Economics
1145 Krannert Building
West Lafayette, IN 47907-1145
United States
765-494-4199 (Phone)
765-494-9176 (Fax)

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

David L. Hummels (Contact Author)

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Maros Ivanic

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

World Bank - Development Economics Group (DEC) ( email )

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

World Bank - Development Research Group (DECRG)

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

Roman Keeney

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

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