Creator: Kehoe, Timothy Jerome, 1953-, Pujolas, Pau S., and Rossbach, Jack Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 537 Abstract:
Applied general equilibrium (AGE) models, which feature multiple countries, multiple industries, and input-output linkages across industries, have been the dominant tool for evaluating the impact of trade reforms since the 1980s. We review how these models are used to perform policy analysis and document their shortcomings in predicting the industry-level effects of past trade reforms. We argue that, to improve their performance, AGE models need to incorporate product-level data on bilateral trade relations by industry and better model how trade reforms lower bilateral trade costs. We use the least traded products methodology of Kehoe et al. (2015) to provide guidance on how improvements can be made. We provide further suggestions on how AGE models can incorporate recent advances in quantitative trade theory to improve their predictive ability and better quantify the gains from trade liberalization.
Keyword: Trade liberalization, Trade costs, Applied general equilibrium, Armington elasticities, and Input-output linkages Subject (JEL): F14 - Empirical Studies of Trade, F11 - Neoclassical Models of Trade, F13 - Trade Policy; International Trade Organizations, and F17 - Trade: Forecasting and Simulation
Creator: Kehoe, Timothy Jerome, 1953-, Pujolas, Pau S., and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 533 Abstract:
We show that a trade model with an exogenous set of heterogeneous firms with fixed operating costs has the same aggregate outcomes as a span-of-control model. Fixed costs in the heterogeneous-firm model are entrepreneurs' forgone wage in the span-of-control model.
Keyword: Span-of-control model, Firm heterogeneity, Income distribution, and International trade Subject (JEL): D31 - Personal Income, Wealth, and Their Distributions, D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, and F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation