Macro Counterfactuals

Session 3 — quantitative trade models, and a KITE counterfactual

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45 min + exercise

What we cover

  • New quantitative trade models (NQTM) as the workhorse: structural gravity, exact hat-algebra (Caliendo and Parro 2015), multi-sector input–output linkages.
  • The public KITE package, its OECD ICIO 2022 initial conditions, and the shock → solve → welfare pipeline.
  • Russia 2014/2022 as the running case — the scenario table and welfare numbers from Crozet et al. (2025), the convexity-in-coalition argument (Hausmann et al. 2024), and the EU-cost-vs-Ukraine-aid framing.
  • The oil price cap as a hybrid trade–finance–shipping instrument: shadow fleet, dark shipping, and the limits of a static trade-cost wedge.
  • The dynamic / capital-misallocation frontier (Baqaee and Malmberg 2025; Itskhoki and Ribakova 2024), and China decoupling as a structurally identical exercise (Felbermayr et al. 2023).

Slides — Part 3 (PDF)

Exercise 2 · Public KITE, Russia 2022

Run general-equilibrium counterfactuals of the 2022 Russia sanctions with the public julianhinz/KITE package, reproducing the methodology of Chowdhry et al. (2024) at smaller scope. Sanctions are encoded as non-tariff wedges by origin × destination × sector; the model solves in hat-algebra and reports welfare, wages, prices and trade flows. We compare a baseline shock, an extended-coalition variant, and an energy-off counterfactual.

Tech stack

Component What we use
Language R ≥ 4.3 via GNU Make; ~6 GB RAM at peak, ~3–5 min per solve
Model julianhinz/KITE — a multi-country, multi-sector Caliendo–Parro GE trade model as an R package; installed from GitHub with remotes
Data wrangling data.table, magrittr, stringr, countrycode
Output ggplot2, scales (welfare bar chart, comparison table)
Packages installed on first run via pacman::p_load() + remotes::install_github()

Data

  • OECD ICIO inter-country input–output tables, 2022 reference year. The full OECD ICIO country set at 50 ISIC-rev4 industries — the calibrated initial equilibrium KITE solves from. Official landing page: OECD ICIO tables. Sectors are kept at native ICIO granularity (no aggregation).
  • Prepared initial conditions. initial_conditions_ICIO_2022.rds (~3.9 MB) ships inside the repo (exercises/02-kite-russia/input/initial_conditions/), so the session starts at the shock-encoding step.

Exercise repo & README KITE on GitHub

References

Baqaee, David, and Hannes Malmberg. 2025. “Long-Run Consequences of Sanctions on Russia.” AEA Papers and Proceedings 115: 583–87. https://doi.org/10.1257/pandp.20251087.
Caliendo, Lorenzo, and Fernando Parro. 2015. “Estimates of the Trade and Welfare Effects of NAFTA.” Review of Economic Studies 82 (1): 1–44. https://doi.org/10.1093/restud/rdu035.
Chowdhry, Sonali, Julian Hinz, Katrin Kamin, and Joschka Wanner. 2024. “Brothers in Arms: The Value of Coalitions in Sanctions Regimes.” Economic Policy 39 (118): 471–512. https://doi.org/10.1093/epolic/eiae019.
Crozet, Matthieu, Julian Hinz, and Patrik Šváb. 2025. Trade Sanctions. Working paper (R&R, Oxford Research Encyclopedia of Economics; Finance). https://julianhinz.com/research/trade_sanctions/.
Felbermayr, Gabriel, Hendrik Mahlkow, and Alexander-Nikolai Sandkamp. 2023. “Cutting Through the Value Chain: The Long-Run Effects of Decoupling the East from the West.” Empirica 50 (1): 75–108. https://doi.org/10.1007/s10663-022-09561-w.
Hausmann, Ricardo, Ulrich Schetter, and Muhammed A. Yildirim. 2024. “On the Design of Effective Sanctions: The Case of Bans on Exports to Russia.” Economic Policy 39 (117): 109–53. https://doi.org/10.1093/epolic/eiad043.
Itskhoki, Oleg, and Elina Ribakova. 2024. “The Economics of Sanctions: From Theory into Practice.” Brookings Papers on Economic Activity 55 (2): 425–97. https://www.brookings.edu/articles/the-economics-of-sanctions-from-theory-into-practice/.