GEPPML: General equilibrium analysis with PPML

James Anderson, Mario Larch and Yoto Yotov

The World Economy, 2018, vol. 41, issue 10, 2750-2782

Abstract: We develop a simple procedure for general equilibrium comparative static analysis of gravity models. Non‐linear solvers are replaced by (constrained) regressions using theoretical properties of the Poisson pseudo‐maximum‐likelihood estimator. Our GEPPML procedure can readily be implemented in any software capable of estimating constrained Poisson models. The procedure accommodates calibrated as well as estimated trade costs while using the estimation power of structural gravity to generate GE comparative statics. Using GEPPML, we quantify the effects of a hypothetical removal of all international borders while preserving the impact of geography on trade. We find that trade liberalisation has reaped at most half the potential world gains from trade in 2002 manufacturing. A complementary counterfactual experiment simulates the removal of the border between Canada and US, thus contributing to the famous “border puzzle” literature in a multicountry setting.

Date: 2018
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