
	Computational (Trade) Policy Modeling www.intereconomics.com/students/CPM.htm Prof.dr. J.F. Francois (EUR) email: francois @ few.eur.nl homepage: www.intereconomics.com/francois
	This version 31 March 2004

OVERVIEW:

This course covers basic techniques employed for computational analysis of trade and tax policy. While emphasis is placed on trade policy, the methods covered are also standard tools in public finance. These methods include partial and general equilibrium methods employed in numeric modeling of trade policy, and in their interpretation in an institutional context. They are also tools of choice for assessments of the broad impact of economic policies – like global warming accords. Another example is the use of model-based analysis for Safeguard and Antidumping assessments under the GATT1994. Goals of the course include development of a basic understanding of the advantages and disadvantages of alternative quantitative approaches, their limitations, and the selection of appropriate methods given institutional, resource, and data constraints. The use of formal quantitative frameworks in the promotion of policy transparency and public discussion of economic policy will also be emphasized. Goals also include informing intuitive insight through numeric example. Finally, we cover recent issues related to testing of model robustness and “non-conventional” econometric methods (related to maximum entropy, generalized methods of moments, and signal processing) for system estimation in the context of CGE modelling frameworks.

In general equilibrium modelling, the approach to treating underlying core theory (intermediate linkages, factor markets, etc.) has become relatively standard. In addition, there now exists higher level CGE modelling packages (like MPSGE) that offer a more intuitive, and less line-by-line programming approach for economic modellers. To take advantage of these developments, the section of the course on large models does not emphasize building an individual model from scratch. Rather, standard model frameworks are presented and used to demonstrate different issues, like dynamic closures and market structure specification. In my view, this is a logical use of the extant set of GE modelling tools. By drawing this distinction between the "build a model from scratch" and "make modifications to existing platforms" approaches, we are able to focus more, in a compressed set of applications, on conceptual issues.

The approach followed here provides a broad overview, somewhat like a crash or immersion course in a foreign language. Hence, the range it covers is broad, from simple spread-sheet partial equilibrium models to large multi-sector and multi-country general equilibrium models requiring specialized software. At the same time, some transition from spreadsheets to GAMS, GEMPACK, and MAPLE programming is offered. We will take a common model and move it through programming packages to develop a sense of the different packages. While this material will provide the student with exposure to these different methods, the only way he or she will really learn is by application. Hence, along with suggested readings and graphic material, applied exercises are also provided. Even this is not really enough though. You need to make your own mistakes. To further this process of learning by doing and learning by error, links are also provided to model-based resources (data, software, and the like) on the internet.

ANCIENT HISTORY NOTE: There was a time when the initial developments in modern econometrics and GE theory were linked to a common set of problems, involving modelling of the economy as a set of simultaneous equations. Hence, as early as 1937 we have F. Dresch trying to build a general equilibrium model, and attempting to implement it empirically based on time series data. We also have R. Frisch criticizing J. Tinbergen’s work, in 1938, because of problems related to identification within his system of equations. Much of this involved the Cowles Commission. Some of the minor characters tied to the Commission won Nobel prizes, and included Arrow, Debreau, Koopmans, Klein, and Haavelmo. (For an overview see [1] and [2]).

COURSE STRUCTURE:

“*” denotes readings required for all students (M.Phil/PhD and MA students).

“**” denotes readings required only for M.Phil/PhD students.

TOPIC AND READINGS

RELATED DOWNLOADS & LINKS

[1] Introduction

readings:

F&R Chapter 1*

powerpoint slides: introduction

[2] Basic partial equilibrium models

readings:

Marrewijk*

F&R Chapter 3,5*

Francois and Hall (2002)*

powerpoint slides: PE models in Excel

files/models:

perfect model

Armington model

A Note on CES functions

The GSIM 25x25 model

GSIM documentation

[3] Basic general equilibrium models

readings:

F&R Chapter 6*

Judd**

powerpoint slides: GE models in Excel

files/models:

Armington model with GE closure

Note on Armington model with CGE closure

The 123 CGE model

[4] Single country models

readings:

F&R Chapter 4,7*

Kehoe & Kehoe**

Shoven et al**

powerpoint slides: Social Accounting Matrices

powerpoint slides: Gams basics

files/models:

the 123 model in GAMS

links:

www.gams.com: the GAMS site

IFPRI SAMs Site : the IFPRI site on Sam construction

[5] Multi-region models

readings:

F&R Chapter 9*

Hertel & Tsigas*

The “small” MPSGE-based model documentation can be viewed here. This was included on your course disk.

The GEMPACK-based version of the small/GTAP model can be viewed here. This was included on your course disk.

powerpoint slides: SIMPLE and GEMPACK basics

links:

www.gtap.org: the GTAP site

http://www.debreu.colorado.edu/gtap/gtapgams.html: Rutherford’s GTAP-in-GAMS site

[6] Investment and long-run effects

readings:

F&R Chapter 12,13*

Rasmussen & Rutherford**

powerpoint slides: steady-state comparisons

links:

Rutherford on dynamics in GAMS:

Modeling Economic Adjustment: A Primer in Dynamic General Equilibrium Analysis

[7] Market-structure in general equilibrium

readings:

F&R Chapter 11**

F,vM,&vT*

powerpoint slides:

[8] Model validation and estimation

readings:

Kehoe**

Kim and Pagan**

Gregory and Smith**

Lai and Treffler**

Arndt et al**

Francois**-

powerpoint slides:

MODELS:

See the index of models.

READINGS:

[1] Applied methods for trade policy analysis: a handbook, J.F. Francois and K.A. Reinert, eds., Cambridge University Press: New York, 1997, 1998.

[2] Computational Modeling: Supplementary Readings – available through the Tinbergen Institute secretariat.

SUPPLEMENTARY READINGS:

1. Kehoe, P.J. and T.J. Kehoe, "A Primer on Static General Equilibrium Models," Federal Reserve Bank of Minneapolis Quarterly Review, Spring 18(1), 1994.

2. Shoven, J.B., J. Whalley and W. Wiegard, "Computing General Equilibrium," Chapter 3 in Shoven and Whalley, eds., Applying General Equilibrium, Cambridge University Press: Cambridge UK, 1992.

3. Hertel, T.W and M.E. Tsigas, "Structure of GTAP," Chapter 2 in T.W. Hertel, ed., Global Trade Analysis, Cambridge University Press: Cambridge, UK, 1997.

4. Judd, K.L., "Nonlinear Equations," Chapter 5 in Judd, Numerical Methods in Economics, MIT Press: Cambridge MA, 1998.

5. Rasmussen, T.N and T.F. Rutherford, "Modeling Overlapping Generations in a Complementarity Format," Department of Economics working paper, University of Colorado, 2001.

6. Kehoe, T.J., "Social Accounting matrices and Applied General Equilibrium Models," Federal Reserve Bank of Minneapolis Working Paper 563, January 1996.

7. Kim, K. and A.R. Pagan, "The Econometric Analysis of Calibrated Macroeconomic Models," Chapter 7 in Handbook of Applied Econometrics, Basil Blackwell: London, 1995.

8. Gregory, A.W. and G.W. Smith, "Statistical Aspects of Calibration in Macroeconomic Models," Chapter 25 in Madalla, Rao and Vinod eds., Handbook of Statistics, vol 11, Elsevier, 1993.

9. Lai, H. and D. Trefler, "The Gains from Trade: Standard Errors with the CES Monopolistic Competition Model," University of Toronto, manuscript, October 1999.

10. Arndt, C., S. Robinson, and F. Tarp, "Parameter Estimation for a Computable General Equilibrium Model: A Maximum Entropy Approach," IFPRI Discussion Paper No. 40, February 1999.

11. Francois, J.F., "Flexible methods for Estimation and Inference in Large Non-Linear Systems: An Application to CGE Models," Tinbergen Institute, 2001.

12. Finger, J.M., “Policy Research,” Journal of Political Economy, no89, 1981.

13. Francois, J.F. and H.K. Hall, “Global Simulation Analysis of Industry-Level Trade Policy,” mimeo (World Bank), 2002.

14. Marrewijk, C. van (2002), "Applied trade policy modeling," chapter 17 from International trade and the world economy, Oxford University Press, Oxford, UK.

15. Francois, J.F., Hans van Meijl and Frank van Tongeren (2003), Trade Liberalization and Developing Countries Under the Doha Round, Tinbergen Institute discussion paper.

SOME POLICY APPLICATION LINKS

International Food Policy Research Institute:

Discussion papers on food policy, trade, poverty, &tc:

http://www.ifpri.cgiar.org/divs/tmd/dp.htm

World Bank

Trade and development background papers:

http://www.worldbank.org/trade/

U.S. International Trade Commission

Special studies on trade policy (look at the “economic effects” studies):

http://www.usitc.gov/332s/332index.htm

Global Trade Analysis Project index of applications

http://www.gtap.org