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GTAP Resource #2068

"Decomposing NAFTA: An Application of the USAGE Model and an Approach to Model Validation"
by Koopman, Bob, Ashley Winston and Alan Fox

USAGE (also known as MONASH-USA) is a detailed dynamic general equilibrium model of the US being developed by the Centre of Policy Studies in collaboration with the U.S. International Trade Commission. In common with all MONASH-style general equilibrium models, USAGE is designed to facilitate four types of analyses:
Historical simulations, that estimate the paths of unobservable variables over a historical period, such as changes in technology and consumer preferences;
Decomposition simulations, in which periods of economic history are explained in the context of the model and with reference to various driving factors estimated in the historical simulation;
Forecasting simulations, in which forecast or “business as usual” baselines consistent with historical structural processes (derived from historical and decomposition analysis) and expert opinion are generated, in part to act as baselines for policy analysis; and
Policy simulations, where policy and other structural changes are imposed, and deviations calculated from the baseline.
In the first part of the paper, we conduct a decomposition of the effect of the NAFTA agreement on the US economy, using the USAGE model. This involves running the first two types of simulation outlined above: a historical simulation, and a decomposition simulation.
The historical simulation is used to generate information about conventionally unobservable variables. The approach involves (a) exogenising many of the naturally endogenous variables (i.e. those usually explained in a CGE model), (b) imposing shocks on these variables calculated from data provided by the historical record and (c) endogenising the otherwise naturally exogenous or “unobservable” variables, allowing them to accommodate these data. For example, with information about relative commodity prices and household disposable income from history, it is possible to make an estimate of the implied movements in consumer preferences over the same period.
The decomposition analysis then utilises this information (imposed now as exogenous shocks) along with many other driving factors taken from the historical record, to allow an assessment of the contribution of these factors to US economic growth. In this way, a quite detailed description of the evolution of the US economy during the period covered by the data is generated, and the roles of various driving-factors related to the NAFTA agreement are discussed.
In the second part of the paper, we describe a somewhat novel application of a CGE model in which the results of the decomposition analysis are applied in the pursuit of “model validation”. A rigorous and meaningful “validation” of CGE models is a difficult task, and potentially one of limited utility, but nevertheless the issue of model credibility is becoming increasingly important in policy-making circles. As such, some type of model assessment is an important and useful exercise. Armed with the detailed industry-by-industry breakdown of recent US economic history provided by the decomposition analysis, we consider the “credibility” of the explanation provided by the model by assessing the extent to which its explanation of history is sensible and robust. Broadly speaking, the credibility of the explanation provided BY the model in the context OF the model is an issue addressed by asking the following question: In providing a decomposition of history, is the model able to reconcile its own structure with this history in reasonable and believable way? In conducting this exercise, we use the decomposition results to suggest a method for assessing the credibility of the model’s theoretical structure ex post, thereby indirectly addressing its “validity”. A discussion is provided of the relationship between result interpretation and model validation.

Resource Details (Export Citation) GTAP Keywords
Category: 2006 Conference Paper
Status: Published
By/In: Presented at the 9th Annual Conference on Global Economic Analysis, Addis Ababa, Ethiopia
Created: Koopman, B. (5/1/2006)
Updated: Koopman, B. (5/1/2006)
Visits: 3,005
- Calibration and parameter estimation
- Baseline development development
- North America

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