Calibration and Parameter Estimation for a Melitz Sector in a CGE Model
This chapter is about giving numbers to parameters and unobservable variables in a Melitz CGE model. We start by describing how a Melitz model can be calibrated. This is the process by which unobservable variables (preference and fixed cost variables, δ’s, F’s and H’s) are evaluated so that for given parameter values (inter-variety substitution elasticities and productivity distribution parameters, σ and α) the model reproduces base-year data. We find that for a Melitz model there are multiple legitimate calibration possibilities but that the choice between these does not affect simulation results. Then, we review the method that Balistreri et al. (2011) have pioneered for estimating parameters in a Melitz model. This method combines calibration and estimation. Rather than setting initial values for unobservable variables to reproduce base-year data, Balistreri et al. impose theoretically preferred structures on the unobservable variables. These structures are incompatible with precise calibration, but pave the way for estimation. Parameters can be estimated by choosing the values that allow calibration to base-year data that is as close as possible subject to meeting the preferred structural constraints on the unobservable variables. Balistreri et al.’s approach is likely to be a starting point for many potentially fruitful calibration/estimation efforts.
KeywordsCalibration Estimation Melitz Armington Balistreri
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