Register  |  Login  |  Inquiries  |  Sitemap
Advanced Search
Journal of Economic Integration 2004 September;19(3) :626-649.
DOI: https://doi.org/10.11130/jei.2004.19.3.626
Parameter Estimation and Measures of Fit in A Global, General Equilibrium Model
Jing Liu
Channing Arndt and 
Thomas W. Hertel 
Household Credit Services
Purdue University
Global Trade Analysis Project (GTAP), Purdue University
Copyright ©2004 Journal of Economic Integration
ABSTRACT

Computable General Equilibrium (CGE) models have been widely used for quantitative analysis of global economic issues. However, CGE models are frequently criticized for resting on weak empirical foundations. This paper builds on recent work in macro-econometric estimation, developing an approach to parameter estimation for a widely employed global CGE model, the Global Trade Analysis Project (GTAP) model. An approximate likelihood function is developed and the set of optimum elasticity values is obtained by maximizing this approximate likelihood function in the context of a back casting exercise. In addition, two statistical tests are performed. The first of these tests compares the standard GTAP elasticity vector with the estimated trade elasticity vector. It rejects the null hypothesis of equality between the two sets of trade elasticities. The second test examines the widely maintained hypothesis known as the "rule of two", by which the elasticity of substitution across imports by sources is set equal to twice the elasticity of substitution between domestic goods and imports. We fail to reject this common rule of thumb. We conclude that there is much to be gained by nesting CGE models within an estimation framework as this opens the way for formal evaluation of model performance and parameterization.

JEL Classification: C3, D5, F1

Keywords: CGE models | estimation | validation | trade elasticities
 
REFERENCE
1. McCallum, J.T. (1995). "Natural Borders Matter: Canada-U.S. Regional Trade Patterns." American Economic Review 85: 615-623
2. McDougall, R. A., A. Elbehri, and T.P. Truong eds. (1998). Global Trade, Assistance, and Protection: The GTAP 4 Data Base. Center for Global Trade Analysis, Purdue University.
3. McKibbin, W. J. and P.J. Wilcoxen (1999). The Theoretical and Empirical Structure of the G-Cubed Model. Economic Modeling 16: 123-148.
Editorial Office
Center for Economic Integration, Sejong Institution, Sejong University, 209, Neungdong-Ro, Gwangjin-Gu,
Seoul, 05006, Korea
TEL : +82-2-3408-3338    FAX : +82-2-3408-3338   E-mail : jei@sejong.ac.kr
Browse Articles |  Current Issue |  For Authors and Reviewers |  About
Copyright© by Center for Economic Integration. All right reserved.