Predictable general equilibrium models, often used to analyze free trade agreements, are often criticized for their poor econometric base. This paper improves the link between econometric estimates of important parameters and their use in the CGE analysis to better assess the likely outcome of a U.S. Free Trade Area (FTAA). Our econometric work focuses on estimating a particular parameter, the elasticity of substitution between imports from different countries, which we see as central to our assessment of the normative impact of the ESTV. We adapt the data in the econometric exercise to the above policy experience and use both the point estimates and the standard errors associated with it in our ESTV analysis, which explicitly takes into account the degree of uncertainty in the underlying parameters. In particular, we are drawn from the distribution of parametric values indicated by our econometric estimates to generate a distribution of the results of the model from which we can build confidence intervals. We find that imports are increasing in all regions of the world as a result of the free trade agreement, and this result is robust in relation to fluctuations in trade elasticities. Nine of the thirteen free trade regions are experiencing a well-being gain in which we are more than 95% confident. We conclude that there is great potential for combining econometric work and policy analysis based on the EMB, in order to achieve a number of results that should be more satisfactory for demanding policy makers. Hertel, Thomas – Hummels, David – Ivanic, Maros – Keeney, Roman, 2007.
“To what extent can we be confident from CGE-based assessments of free trade agreements?”, Economic Modelling, Elsevier, 24(4), pages 611-635, July. Courtesy Purdue University – Center for Global Trade Analysis; Center for Robust Decisionmaking on Climate – Energy Policy (RDCEP) The authors thank an anonymous critic and participants at the Empirical Trade Analysis conference at the Woodrow Wilson Centre, who participated in the sixth annual meeting of global economic analysis, Volodymyr Lugovskyy, Alexandre Skiba and Glenn Harrison, who received detailed comments on previous versions of this document. . Purdue University – Institute of Economics; National Bureau of Economic Research (NBER) Hummels is associate professor of economics at De Purdue University, West Lafayette, IN 47907-1145. Hertel is Distinguished Professor and Executive Director of the Center for Global Trade Analysis at Purdue University, West Lafayette, IN 47907-1145.