How Confident Can We Be in Cge-Based Assessments of Free Trade Agreements?
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)
World Bank; World Bank - Development Economics Group (DEC); World Bank - Development Research Group (DECRG)
NBER Working Paper No. w10477
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.
Number of Pages in PDF File: 41
Date posted: May 23, 2004