Computable General Equilibrium Modeling: Theory and Applications

Description

Many books have been written on computable general equilibrium (CGE) modeling. However, there are certain important areas for economic policy that have been largely overlooked. This intermediate/advanced text presents the topic as a methodology for the analysis of macro and fiscal policies in modern economies while introducing levels of disaggregation that are beyond the scope of standard macro models. The book begins by presenting the historical and intuitive background of general equilibrium analysis. Moving on, computer software is introduced to derive numerical solutions for economic models. The authors provide examples of code, bringing in data sources that have become the foundations of CGE applications. The methodology presented here, which differs from other CGE books, includes financial assets, government budget deficits, and debt financing of private investment. These topics are analyzed in the context of dynamic optimization, generating endogenous variables such as inflation, interest, and growth rates. The book also devotes significant attention to the applications of CGE models to developing economies. This textbook comes with a range of downloadable supplements and will be a valuable resource for students taking a CGE course as part of a program in advanced microeconomics, macroeconomics, development economics, or international trade economics. Cover Half Title Endorsements Title Copyright Contents Preface 1 Introduction 1.1 Historical background 1.2 Intuition of computation 1.3 Areas of application 2 Applications 2.1 Indirect taxes 2.2 Direct taxes 2.3 Subsidies 2.4 Government spending 2.5 Financing budget deficits 2.6 Central bank behavior 2.7 Foreign sector 3 Fixed points 3.1 Mappings 3.2 Brouwer fixed point theorem 3.3 Integer labeling 3.4 Primitive sets 4 Fixed points, continued 4.1 Simplicial subdivisions 4.2 The house with two doors 4.3 Brouwer’s theorem: a constructive proof 5 The linear economy and Kakutani’s theorem 5.1 The indeterminacy of output in an economy with linear production 5.2 An application to an exchange economy 5.3 Why Brouwer theorem will not work, and what will? 5.4 The concept of vector labeling and its application 6 Linear production technologies 6.1 The importance of linear models of intermediate and final production 6.2 Substitution in factor inputs, linearity in intermediate and final production 6.3 The steps to a fixed point solution to an economy with linear production and (almost) arbitrary consumer preferences 7 Numerical solutions; some examples 7.1 The exchange model 7.2 Three good CGE exchange model 7.3 Writing the code 7.4 Model of production with decreasing returns to scale 7.5 Finding equilibrium computationally 8 Production and government 8.1 Calibrating our program 8.2 Calculating excess demands 8.3 Running the model 8.4 Adding taxes and transfers 9 Incorporating intermediate inputs 9.1 Input-output matrices 9.2 Intermediate production 9.3 Factor demands 10 Trade, the Armington approach 11 Taxes and the government 11.1 The simultaneity problem between taxes and transfers 11.2 The introduction of a tax proxy 11.3 The solution of the model with an extra dimension for taxes 11.4 The possible generalization of the tax proxy concept to other applications 12 Social accounting matrices (SAM) and the construction of a CGE model 12.1 Introduction and definitions 12.2 An example of a sophisticated SAM: the case of Pakistan 12.3 The first step: extraction of an IO matrix from the SAM 13 Dynamic CGE models with financial assets 13.1 Introduction 13.2 Perfect foresight models 13.3 Partial perfect foresight: short run perfect foresight with adaptive updating for the long run 13.4 The consumer’s problem 13.5 Production and financial assets 13.6 Investment 13.7 Tax compliance 13.8 Banking 14 Financial assets in the dynamic CGE model (continued) 14.1 Why do we need financial assets? Theoretical purity versus the real world 14.2 Private investment and the sale of bonds 14.3 Financing the government budget deficit with the sale of public bonds 14.4 The foreign sector 14.5 Banking, defaults, and credit constraints 15 Monetization and the introduction of a central bank 15.1 Why do consumers hold money? A simple cash-in-advance specification 15.2 Budget deficits and the adjustment of the exchange rate 15.3 The other source of money creation: capital flows in the open economy model 15.4 The CGE model now becomes a recognizable macro model 16 CGE models and their application to developing countries: The example of tax evasion and the underground economy 16.1 Background 16.2 Tax evasion in developing countries 16.3 A general equilibrium specification 16.4 Simulations References Index