The Structure of Applied General Equilibrium Models (original) (raw)

Economica, 1986

Walrasian general-equilibrium theory provided the central framework of 20 th century economics, "the ultimate model of the market" (John Shoven and John Whalley 2015, 2). Joseph Schumpeter considered it the "Magna Carta" of economics, providing both a constitutional document and a map for the field (1954, 242 and 827). In the 1950s and 1960s, Harry Johnson (1951-52, 1956), Arnold Harberger (1962), and others used general-equilibrium methods to study a variety of applied policy issues, such as the welfare effects of tariffs and the incidence of the corporate income tax. The models used by these researchers were small enough that they could be solved analytically. By the 1970s, economists were developing general-equilibrium models of sufficient size and complexity that it was necessary to use computers to find numerical solutions. In this paper, we will discuss both analytical and computational models, but our main focus is on the computational models. The computational models have come to be known as applied general-equilibrium (AGE) or computational GE or computable GE (CGE) models. We will refer to the computational models as AGE models, even though the analytical models also fall under the rubric of applied work. AGE models involve mathematical specifications of the behaviors of agents, who interact through supply and demand for different goods in a Walrasian general-equilibrium system. Government policies are typically modeled as constraints to be manipulated. The models produce computer simulations of the effects of policy changes on economic variables, such as prices, quantities, growth rates, employment, income, and economic efficiency. AGE models are most widely employed in international trade, public finance, economic development, and

General Equilibrium Models: An Overview

This article reviews the literature on general equilibrium models, relevant to the Chilean economy, and revised versions of the papers presented at the Conference of General Equilibrium Models for the Chilean Economy organized by the Central Bank of Chile, that will be published in a book by the same name (edited by Rómulo Chumacero and Klaus Schmidt-Hebbel, 2005). This introductory chapter provides a brief overview of the development and application of three families of GEMs: macroeconomic GEMs, computable general equilibrium models, and overlapping generations models. We also summarize the scope and main results of the twelve GEMs that comprise the volume.

General equilibrium modelling: The state of the art

MPRA Paper No 105313, 2020

The general equilibrium approach's theoretical superiority has always been accepted in economic literature, as a robust, complete, and detailed general temporal equilibrium model that shows how money, production, saving level, capital goods and services prices, and the interest rate are jointly determined. This article is a time-path exploration of the literature on propositions related to general equilibrium modelling, and a highlight of its contemporary relevance. Over time and till now, the Walras’ proposition at best takes primacy, amidst others, and improvements in the development of sophisticated sub-models of asset markets within the general equilibrium framework had meant substantial progress since this permit analysis under more realistic conditions. However, limitations are clear, and steady advances in the model can better improve its application.

CEEAplA WP No . 06 / 2006 Computable General Equilibrium Models : A Literature Review

2006

Applied general equilibrium models have become popular tools used on ongoing economic policy debates. In this paper we discuss at length the most proeminent features of applied general equilibrium models in a comprehensive and non-technical way, thus accessible to the reader interested in economic policy but with no prior formal exposure to economic modeling. We rationalize the increasing political demand for such models as policy analysis tools. We argue that applied general equilibrium models are best equipped to model regional economies. Keywords: Regional Economic Modeling; CGE Models. JEL Codes: R11; C68. This paper was written within the development of a project to develop An Instrument of Economic Policy Analysis for the Azores, nanced by several institutions, namely, the US Department of Agriculture, the Luso-American Development Foundation and the Regional Government of the Azores. The project was managed by CEEAplA, an FCT supported center of the Universities of the Azo...

A standard computable general equilibrium (CGE) model in GAMS

2002

Computable general equilibrium (CGE) models are used widely in policy analysis. The purpose of this paper is to contribute to and facilitate the use of CGE models. The paper includes a detailed presentation of a “standard” CGE model (an equation-by-equation description) and its required database. It incorporates features developed in recent years in research projects conducted at IFPRI. These features, which are of particular importance in developing countries, include household consumption of non-marketed (or “home”) commodities, explicit treatment of transaction costs for commodities that enter the market sphere, and a separation between producing activities and commodities that permits any activity to produce multiple commodities and any commodity to be produced by multiple activities. The paper discusses the implementation of the model in GAMS (the General Algebraic Modeling System) and is accompanied by a self-extracting zip file, which includes the GAMS files for the model, sa...

Global Comparative Statics in General Equilibrium: model building from theoretical foundations

2021

International trade economists made seminal contributions to general equilibrium theory, moving away from an emphasis on existence of equilibrium to algebraic formulations which enabled us to characterize key relationships between parameters and variables, such as that between tariffs and domestic factor prices and welfare. But the early analyses remained limited in value for policy evaluation: the analysis was local, it provided only qualitative results, it was limited to very small models, and strictly interior solutions had to be assumed. The contribution of this paper is pedagogic and methodological, providing a primer for those wishing to do or teach general-equilibrium counterfactuals on computable general-equilibrium (CGE) or structural econometric models. I show how the tools from early local comparative statics analyses can be generalized via the use of Shepard's lemma, duality, complementarity and the Karush-Kuhn-Tucker theorem into a global, quantitative analysis of large changes in high-dimension models which also allows for regime changes and corner solutions. I then show how the resulting non-linear complementarity problem directly translates into a numerical model using GAMS (general algebraic modeling system). The paper concludes with two examples: (a) comparison of a tax versus a real trade/transactions cost, (b) comparison of a tax versus a quantitative restriction such as a quota or license.

Modeling economic adjustment: A primer in dynamic general equilibrium analysis

Journal of Economic …, 1997

We describe the formulation and solution of dynamic general equilibrium models in nonlinear programming and mixed complementarity formats. Our objective is pedagogic. The essential equations for a few models are presented in a compact and accessible format, along with computer programs which concretely illustrate the models. We present two methods of approximation for the infinite horizon models. The alternative model formulations are illustrated with a simple Ramsey model based on specific functional forms, and we compare computational precision of alternative termination methods. Finally, we illustrate how the dynamic equilibrium framework can be extended to address a practical economic problem. Here we consider the implementation of environmental taxes to hasten the transition from conventional to nonconventional energy sources. 1 1 Computer programs used to produce computational results in this paper may be downloaded from the MobiDK web site: http://www.gams.com/projects/dk/MobiDK.htm. These programs have been developed using the GAMS subsystems CONOPT, PATH and MPSGE. 2 developed in this section is based on stylized data for Denmark. 1 2 Four Formulations of the Single Sector Ramsey Model A familiar representation of the Ramsey model of savings and investment begins with an infinitely-lived representative agent. The closed economy consists of a household with an exogenous labor supply over time. One good is produced in each period using inputs of labor and capital, and output in each period can be either consumed or invested. There is perfect competition in all markets and no taxes. Individuals are assumed to have an infinite horizon, and expectations by private agents are forward-looking and rational. Hence, all agents have perfect foresight because there is no uncertainty. These assumptions imply that the allocation of resources by a central planner who maximizes the utility of the representative agent is identical to the allocation of resources in an undistorted decentralized economy.

Parameter Estimation and Measures of Fit in A Global, General Equilibrium Model

Journal of Economic Integration, 2004

Computable General Equilibrium (CGE) models have been widely used for quantitative analysis of global economic issues. However, CGE models are frequently criticized for resting on weak empirical foundations. This paper builds on recent work in macro-econometric estimation, developing an approach to parameter estimation for a widely employed global CGE model, the Global Trade Analysis Project (GTAP) model. An approximate likelihood function is developed and the set of optimum elasticity values is obtained by maximizing this approximate likelihood function in the context of a back casting exercise.