Working Paper: NBER ID: w3118
Authors: Kala Krishna; Phillip Swagel; Kathleen Hogan
Abstract: We examine the sensitivity of simple calibration models of trade in imperfectly competitive industries to changes in model specification, as well as to changes in the calibration parameters. We find that not just the magnitude, but also the sign of the optimal trade policies is very sensitive to the change in model specification. Indeed, use of policies derived from the 'wrong' model can reduce welfare from the status quo. However, the welfare gains to be obtained from application of the 'correct' model remain limited. Calibration models nonetheless provide useful estimates of firm and market behavior over time, as well as disaggregated elasticities of demand. We conclude that careful empirical work is necessary to guide model selection. For the present, the case for activist trade policy on the basis of calibration models should not be made.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model specification (C52) | optimal trade policies (F13) |
| incorrect models (C52) | welfare reduction (I38) |
| model accuracy (C52) | welfare effects of trade policies (F10) |
| model precision (C52) | welfare outcomes (I38) |