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GTAP Resource #5000

"Growth, Expectations and Structural Change - The Dixon – Wilcoxen – Malakellis -Model Re-Visited"
by Honkatukia, Juha

This paper proposes a way of combining the strengths of CGE models in producing baselines that are consistent with the observed historical growth trends with the ability to deal with the intertemporal issues often emphasised by macro models.
Our practical focus in on a situation, where public expenditure relative to GDP is permanently increasing in the future because of changes in the age structure of the population, and which would therefore require higher taxes sometime in the future. The text-book macro models suggest that consumers know this and adjust their consumption accordingly. We attempt to allow for a choice between policy instruments that can be used to maintain public sector budget balance in the future, and use CGE models to study the issue.
We revoke an approach that originates to the work of Dixon, Parmenter, Powell and Wilcoxen and was developed further by Malakellis (2000). The ORANI-RE model is intertemporal but, unlike other models in the CoPS (Centre of Policy Studies) vein, requires the use of an “outside” baseline. In this respect it resembles the main stream of DSGE models, where the baseline is produced econometrically. Here, we use a generic CoPS -type model instead to produce a baseline capturing most of the stylised facts of long-run growth. We also compare the Malakellis model to the iterative procedure in standard CoPS models. The Malakellis model has the advantage of solving very fast. But while we find the use of two models reasonable smooth, there is still something to be said for the use of iterative methods, since this approach is readily provided in the CoPS models. Here, we suggest a slight extension, with CoPS dynamics being applied also to the consumer’s decision problem as well as the investors’. We find the iterative approach to be able to capture the intertemporal linkages that the Malakellis model does. This does come at the cost of longer running times but the disadvantage is by no means excessive.

Resource Details (Export Citation) GTAP Keywords
Category: 2016 Conference Paper
Status: Published
By/In: Presented at the 19th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2016
Created: Honkatukia, J. (4/15/2016)
Updated: Honkatukia, J. (4/15/2016)
Visits: 974
- Baseline development
- Dynamic modeling
- Economic crisis
- Economic growth
- Europe (Northern)

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