Using Structural Break Tests to Evaluate Policy Change: The Impact of U.S.-Japan Trade Agreements

Abstract

Empirical evaluations of trade agreements often rely on descriptive statistics or univariate time series methods to detect subsequent changes in trade flows. We conduct a more satisfactory test by evaluating an agreement in the context of a structural econometric model. Consistent with trade theory, import demand is modeled as a cointegrating relationship with income and relative price variables, where trade agreements may cause structural changes in cointegrating vectors. This approach is applied to study the effect of several U.S.-Japan market-opening trade agreements; in three of seven industries we find evidence of structural change that may be related to trade agreements.structural break tests; U.S.-Japan trade agreements; import promotion policies