Computable General Equilibrium Models of Trade in the Modern Trade Policy Debate

Gang Chen, Xue Dong (), A. Patrick Minford, Guanhua Qiu, Yongdeng Xu and Zequn Xu
Additional contact information
Gang Chen: Cardiff Business School
Xue Dong: Zhejiang University of Finance and Economics
Guanhua Qiu: Cardiff Business School
Zequn Xu: Cardiff Business School

No E2021/14, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We set up two rival Computable General Equilibrium (CGE) models of world trade, one based on classical theories of comparative advantage, the other based on recent gravity theories. We have tested them by indirect inference on the time-series of trade facts for five major countries or country blocs: the UK, the US, China and the EU. The UK is a small enough economy for the rest of the world's behaviour to be treated as exogenous, so we test the UK model with this held constant; the other countries/blocs are large so we test their model by a `part of model' test in which the other world variables are simulated by a reduced form VAR of the unknown true world model.. We show by Monte Carlo experiments that these tests have high power. Our findings are that the Gravity version of the world model is rejected strongly for two of these country cases, but passes the test for the other two. By contrast the Classical model is comfortably accepted in all cases; our power experiment implies that this world model is very likely to be close to the truth and should therefore be used for policy analysis. The policy message of the classical model is that protection is damaging to welfare; this includes protection by customs union, where even though some members may gain, general welfare is reduced.

Keywords: Pseudo-true inference, DSGE models, Indirect Inference; Wald tests, Likelihood Ratio tests; robustness (search for similar items in EconPapers)
Pages: 48 pages
Date: 2021-06
New Economics Papers: this item is included in nep-int and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Computable General Equilibrium Models of Trade in the Modern Trade Policy Debate (2022)
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