Quantitative Trade Models: Developments and Challenges

Timothy J. Kehoe, Consultant

Pau S. Pujolàs

Jack Rossbach

September 2016 | Federal Reserve Bank of Minneapolis Staff Report 537

Applied general equilibrium (AGE) models, which feature multiple countries or regions, multiple sectors, and input-output linkages across sectors in a Walrasian general equilibrium framework, have been the dominant tool for evaluating the impact of trade liberalization since the 1980s. We provide an overview of the historical development of AGE models and a guide as to how they are used to perform policy analysis. We then review and document shortcomings in the performance of AGE models in predicting the sectoral effects of past trade reforms, that is, we show that AGE models often perform poorly. We provide suggestive evidence that incorporating some of the recent advances in quantitative trade theory in AGE models can improve their predictive ability.