Working Paper: NBER ID: w14046
Authors: James E. Anderson
Abstract: Most empirical policy work requires the aggregation of policies. Trade policy aggregation exemplifies the aggregation problem poignantly, with thousands of highly dispersed trade barriers. This paper provides methods of policy aggregation that are consistent with two common objectives of empirical work. One is to preserve real income. The other is to preserve the real volume of activity in the parts of the economy being aggregated. Both objectives must be achieved for consistent multi-country policy modeling. An application to India shows that the standard atheoretic method of aggregation overstates India's real income by around 3 times the global gains from free trade.
Keywords: trade policy; aggregation; real income; economic modeling; India
JEL Codes: C43; D58; F10; F13; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| standard atheoretic aggregation methods (C11) | overstate India's real income (F40) |
| standard atheoretic aggregation methods (C11) | significant aggregation bias (C43) |
| aggregation methods (C43) | preserve relationship between policy and real income (E64) |
| aggregation methods (C43) | preserve relationship between policy and trade volume (F10) |
| dispersion of tariffs (F16) | significant bias in estimation of real income (D31) |
| cutting the dispersion in half (C24) | considerable bias remains (C46) |
| tariffs (F13) | real income (D31) |
| tariffs (F13) | trade volume (F10) |