School of Accounting and Finace
The Hong Kong Polytechnic University
Li Ka Shing Tower, Hung Hom,
Kowloon, Hong Kong
NBER Working Papers and Publications
|September 2002||The Gains from Trade with Monopolistic Competition: Specification, Estimation, and Mis-Specification|
with Daniel Trefler: w9169
The difficulty of incorporating general equilibrium price effects into econometric estimating equations has deterred most researchers from econometrically estimating the welfare gains from trade liberalization. Using a paired-down CES monopolistic competition example, we show that this difficulty has been greatly exaggerated. Along the way, we estimate indeed precisely estimate large welfare gains from trade liberalization as measured by compensating variation. Unlike calibration methods, econometric methods allow researchers to isolate the violence done by the model to the data. We find that the CES monopolistic competition model horribly mis-specifies behavioural price elasticities and general equilibrium price feedbacks. The model as conceived is therefore of limited value for analysi...