Sensitivity analysis in applied general equilibrium models: An empirical assessment for MERCOSUR free trade areas agreements

• Published in: The Quarterly review of economics and finance Vol. 48; no. 2; pp. 287 - 306
• Main Authors: Domingues, Edson P., Haddad, Eduardo A., Hewings, Geoffrey
• Format: Journal Article
• Language: English
• Published: Greenwich Elsevier Inc 01.05.2008; Elsevier; Elsevier Science Ltd
• Series: The Quarterly Review of Economics and Finance
• Subjects: Applied general equilibrium model; Economic models; Free trade; Free trade areas; Sensitivity analysis; Studies; Trade; Trade agreements; Trade liberalization; Brazil; Uruguay; Argentina; Trade; Free trade areas; Applied general equilibrium model
• ISSN: 1062-9769; 1878-4259
• DOI: 10.1016/j.qref.2006.12.018

In this paper, an applied general equilibrium (AGE) model is used to assess the welfare results of alternative free trade areas (FTA) for three MERCOSUR countries, Brazil, Argentina and Uruguay. The results of the sensitivity to shocks and parameters are evaluated. In such a way, the robustness of the results to different degrees of intra-blocs trade liberalization and trade elasticities will be assessed. It is shown that welfare gains for Brazil are very robust to different degrees of trade liberalization, and allocation effects drive these gains. For Argentina and Uruguay, welfare gains depend heavily on a higher degree of liberalization, as they are connected to terms of trade effects. This paper shows that trade elasticities are important parameters driving the model's results, as welfare gains for Argentina and Uruguay in both scenarios are very sensitive to these parameters. Therefore, AGE model's results of alternative FTA for MERCOSUR countries need to consider the uncertainty about parameters and shocks.