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An evaluation of the performance of applied general equilibrium models of the impact of NAFTA
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 ...
Working Paper
An evaluation of the performance of an applied general equilibrium model of the Spanish economy
In 1985?86 the authors were members of a team that constructed a static applied general equilibrium model that was used to analyze the impact on the Spanish economy of the 1986 fiscal reform, which accompanied Spain?s entry into the European Community. This paper compares the results obtained to recently published data for 1985?87; we find that the model performed well in predicting the changes in relative prices and resource allocation that actually occurred, particularly if we incorporate exogenous shocks that affected the Spanish economy in 1986. We also analyze the sensitivity of the ...
Working Paper
Firm Entry and Exit and Aggregate Growth
Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption ...
Discussion Paper
Improving the Analysis of Trade Policy
The standard model that economists use to analyze the impact of trade reforms systematically underpredicts changes in trade patterns. It not only underestimates overall trade magnitudes, but also fails to predict which industries experience the largest trade increases. This failure results from not accounting for rapid growth in post-liberalization trade of the products that these industries produce. {{p}} This paper documents these weaknesses and demonstrates an alternative methodology. {{p}} Our modified model performs better because it accounts for the rapid growth of trade in products ...
Journal Article
A primer on static applied general equilibrium models
In this paper, we describe and analyze the basic structure of the applied general equilibrium (AGE) models used to assess the effects of government trade policies. Once we have constructed the basic model, we extend it to cover features such as increasing returns to scale, imperfect competition, and differentiated products, following the AGE modeling trend of the past 10 years. We then compare a static AGE model's predictions with the actual data on how Spain was affected by entering the European Community and find that, when exogenous effects are included, a static AGE model's predictions ...
Report
Gambling for redemption and self-fulfilling debt crises
We develop a model for analyzing the sovereign debt crises of 2010?2012 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal ...
Report
Are shocks to the terms of trade shocks to productivity?
International trade is frequently thought of as a production technology in which the inputs are> exports and the outputs are imports. Exports are transformed into imports at the rate of the price> of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a> change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that> this line of reasoning cannot work in standard models. Starting with a simple model and then> generalizing, we show that changes in the terms of trade have no first-order effect on> productivity when ...
Report
Trade, growth, and convergence in a dynamic Heckscher-Ohlin model
In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher-Ohlin model ? a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model ? with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per ...
Report
Constructing Pure-Exchange Economies with Many Equilibria
We develop a restart algorithm based on Scarf’s (1973) algorithm for computing approximate Brouwer fixed points. We use the algorithm to compute all of the equilibria of a general equilibrium pure-exchange model with four consumers, four goods, and 15 equilibria. The mathematical result that motivates the algorithm is a fixed-point index theorem that provides a sufficient condition for uniqueness of equilibrium and a necessary condition for multiplicity of equilibria. Examining the structure of the model with 15 equilibria provides us with a method for constructing higher dimensional models ...
Report
Modeling great depressions: the depression in Finland in the 1990s
This paper is a primer on the great depressions methodology developed by Cole and Ohanian (1999, 2007) and Kehoe and Prescott (2002, 2007). We use growth accounting and simple dynamic general equilibrium models to study the depression that occurred in Finland in the early 1990s. We find that the sharp drop in real GDP over the period 1990?93 was driven by a combination of a drop in total factor productivity (TFP) during 1990?92 and of increases in taxes on labor and consumption and increases in government consumption during 1989?94, which drove down hours worked in Finland. We attempt to ...