by Timothy J. Kehoe and Jack M. Rossbach – Federal Reserve Bank of Minneapolis with Kim J. Ruhl – New York University
What is the methodology for predicting changes in bilateral trade across industries following trade liberalization? This Minneapolis Fed study provides looks at growth in trade across industries for the United States and Korea following KORUS, and also evaluates NAFTA. It shows that the author’s methodology — which exclusively focuses on least traded products — would have yielded better predictions than the general equilibrium models employed at the time.
Their results suggest that researchers should include the new products margin in any analysis of the impact of trade reform. The authors hope this finding will spur the development of models that are consistent with the expansion of trade on the new products margin so that we can improve our ability to predict the effects of trade reforms and so that we can perform counterfactual analyses of alternative reforms.
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