Working Paper: CEPR ID: DP14764
Authors: James R. Markusen
Abstract: International trade economists made seminal contributions to general equilibrium theory, moving away from an emphasis on existence of equilibrium to algebraic formulations which enabled us to characterize key relationships between parameters and variables, such as that between tariffs and domestic factor prices and welfare. But the analysis remained limited in value for policy evaluation: the analysis was local, it provided only qualitative results, it was limited to very small models, and strictly interior solutions had to be assumed. The contribution of this paper is pedagogic and methodological, providing a primer for those wishing to do or teach general-equilibrium counterfactuals on (for example) structural models. I show how the tools from early local comparative statics analyses can be generalized via the use of Shepard’s lemma, duality, complementarity and the Karush-Kuhn-Tucker theorem into a global, quantitative analysis of large changes in high-dimension models which also allows for regime changes and corner solutions. I then show how the resulting non-linear complementarity problem directly translates into a numerical model using GAMS (general algebraic modeling system).
Keywords: duality; complementarity; KKT conditions; global comparative statics; corner solutions; GAMS
JEL Codes: F50; D50; D58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tariffs (F19) | Domestic Factor Prices (F16) |
| Tariffs (F19) | Welfare (I38) |
| Traditional Local Comparative Statics (F11) | Inadequate Understanding of Large Changes in Economic Parameters (E19) |
| Duality Techniques (C61) | Transition from Local to Global Analysis (F60) |
| KKT Theorem (C61) | Modeling of Complementarity Conditions (D10) |
| Significant Policy Changes (G18) | Quantitative Assessment using Proposed Framework (C52) |
| Stolper-Samuelson Theorem (F16) | Integration into Modern Analysis of General Equilibrium Models (D50) |
| Rybczynski Theorem (F16) | Integration into Modern Analysis of General Equilibrium Models (D50) |