GTAP Resources: Resource Display
| GTAP Resource #7731 |
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"Creating GTAP-Money: a GTAP model with financial assets and liabilities; monetary policy; excess capacity; and nominal exchange rates" Authors: Dixon, Peter, Maureen Rimmer, Shenjie Chen and Jingliang (Charles) Xiao Abstract Standard GTAP provides a medium-term view of the effects of tariffs and other policies. To enhance GTAP for short-run analysis, we create GTAP-Money by adding to standard GTAP: (1) accumulation of financial assets and liabilities; (2) monetary policy; (3) unemployment, excess capacity and inflation; and (4) nominal exchange rates. Our theoretical specification introduces a financial agent for each country r that solves an optimization problem, taking account of expected rates of return, to determine the allocation of its budget between financing physical capital and buying bonds in all countries. Introduction of financial agents handles features (1) and (2). It provides a framework for keeping track of each country’s wealth, saving, current account, and its accumulation of foreign assets and liabilities. Through its optimization problem, financial agent r responds to monetary tightening (e.g. an increase in interest rates on bonds issued by r’s central bank) by reallocating part of its budget away from acquiring foreign assets and financing r’s physical assets and towards buying government bonds. This is consistent with the aim of monetary policy, namely, to have a short-run modifying influence on domestic demand mainly through affecting physical investment. For embracing feature (3), we specify asymmetric responses of factor prices to changes in demand. We assume that nominal wages do not move down significantly in the short run in response to unemployment but move up sharply if unemployment goes below the normal rate of frictional unemployment. We assume similar asymmetric responses for capital rental rates. We work through the GTAP equations adding a nominal exchange rate for each country r. Endogenous movements in nominal exchange rates [feature (4)] provide the extra degrees of freedom required to determine real exchange rates when domestic price levels are tied down by sticky nominal factor prices. The paper contains illustrative simulations. |
| Resource Details () | GTAP Keywords | ||||||||||||||||
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- GTAP Data Base and extensions - Model extension/development |
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Public Access  Paper (955.3 KB) Replicated: 0 time(s) slides (298.2 KB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions No instructions have been specified. |
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Last Modified: 4/30/2026 12:56:16 PM
