Computable general equilibrium 5063124 224757007 2008-07-10T08:15:07Z Asdirk 4754782 /* Running the CGE model */ '''C'''omputable '''G'''eneral '''E'''quilibrium ('''CGE''') models are a class of empirical economic models used to simulate economy-wide reactions to changes in policy, technology or other external factors. CGE models are based on the Keynesian set of macro balancing equations arranged within a [[social accounting matrix]]. [[CGE model]]s are a descendant of Leontief [[input-output model]]s, and became the preferred modelling method of the World Bank and governments across the world in the 1980's, and today [[CGE model]]s are probably the most utilized tool globally for development planning and macro policy analysis. ==The CGE model== CGE models, despite their mathematical complexity, can be boiled down to a few key operations and technical terms. When these are laid out, the functions and solutions of CGE models become clear, and it emphasizes the scope for theoretical issues in the framework<ref>In the early days of CGE modeling the focus of modelers was on defining these structures of the economy, but much of this work has become standardized, and generally much more limited, within the computer software that is used to build CGE models today</ref>. Overall, the model works by creating a base year from a set of data, with a number of relationships between the variables in the economy. Some of the variables are then perturbed, and a new solution is calculated to see how the economy might react to changes in one or more exogenous factors. ´ ===Social Accounting Matrix=== The [[social accounting matrix|Social Accounting Matrix]] (SAM) is a way of representing the national accounting framework in a matrix form and is important for “CGE models, which are always based on a SAM framework” (Robinson 2003: 1). SAM’s (and thus the national accounting framework) form the empirical base on which the CGE model runs. Thus understanding the SAM is the first agenda item at specialized CGE courses, although their composition and meaning is rarely discussed in papers. SAM's never balance empirically, and so have to be "[[social accounting matrix#Benchmarking|benchmarked]]" to make the rows and columns equal. This provides the 'base year' for the CGE model. The [[social accounting matrix|SAM]], by virtue of being a representation of the national accounting system, fixes the Keynesian macro balancing equation in the model ((I-S)+(G-T)+(X-M)=0), and immediately any model built in a SAM becomes a CGE model, of the modern variety, completely separate from AGE and Arrow-Debreu models. The [[social accounting matrix|SAM]], however, introduces its own problems as the “national income data depend on a particular model of the economy (at least in a broad way) and omit very large areas” (Arrow 2005: 21), which is where the "[[social accounting matrix#Benchmarking|benchmarking]]" comes in. Using a SAM includes the institutional structure assumed in the national accounts into any CGE model. This means that variables and agents are not treated with monetary sourcerecipient flows in mind, but are rather grouped together in different categories according to the United Nations Standard National Accounting (SNA) Guidelines.<ref>For example, the national accounts usually imputes the value of household investment or home-owner ‘rental’ income and treats some public sector institutional investment as direct income flows. Public hospitals and universities in the US for example</ref> - whereas the [[social accounting matrix|SAM]] is trying to show just the explicit flows of money. Thus the data has to be untangled from its inherent SNA definitions to become money flow variables. Rather than disaggregate the whole [[social accounting matrix|SAM]], and break down all the money flows, the tendency is to focus on one aspect of the macro balancing equation depending on the question at hand. That means building models around either the investment-savings cycles or international trade debates or government spending decisions. Typically one or two parts of the macro balance is disaggregated into n sub-accounts, and the last one is left as a simple aggregate account, towards which the model must still adjust. ====Implied Equilibrium==== Once the basic macro balance is benchmarked, you can add (or disaggregate into) any number of rows and columns with new variables, and as long as inflows equal outflows the assumed equilibrium holds. The next implicit assumption is that an equilibrium in a steady state should hold in future time periods, so we can perform external shocks and then empirically observe some (marginal) adjustment mechanism – which is the simulation method. Any debate on the empirical validity of such long run equilibrium is ignored, because the data ‘speaks for itself’ and “the economy under consideration is assumed to be in equilibrium” (Shoven and Whalley 1992: 103) no matter how long term or short term the model calculations will be. Further, the equilibrium nature of this position is not related to the micro [[general equilibrium]] which results from [[Arrow-Debreu]] type theory, but is rather a macro equilibrium, based on the macro balancing equations. This is 'general equilibrium' in the sense of Jones (1965) where a general equilibrium is any situation in which two or more markets are analyzed, and a solution is found. ===Functional Forms and Behavioural Equations=== The literature always refers to the equations that define the relationship between institutions and agents as "Functional Forms" and "Behavioural Equations" but there is no clear delineation as to which is what. Mitra-Kahn (2008) attempts to refine these terms, and argues that "Functional Form" is generally referring to equations that define the relationship between institutions, groups or sectors, while "Behavioural Equations" refer to the equations dealing with single agents. If one considers the CGE model equations as a hierarchy, at the top is the Macro Balancing Equation twoards which the whole model adjusts for a solution. The second level is the Functional Forms where the model builder specifies all the equations which link institutions to each other and to the macro balancing equations. At the bottom are the behavioural equations where the model builder defines agent behaviour, and connects it to functional forms and the macro balancing equation. The most basic CGE model could be specified with only the macro balancing equation, and a formulae connecting each injection to a leakage. Adding more institutional variables, sectors or even single agents are additions which give the CGE model its economy wide appeal, but at the core, the whole model, when shocked, always adjusts to the macro balancing equations, which are at the top of the hierarchy. This illustrates how CGE models are macro models, to which one can add increasing degrees of complexity. ====Functional Forms==== For every institution or variable under investigation some equation (linear or non-linear) is specified to account for the relationship from one to the other, and through to the balancing equation. The usual suspects from neo-classical micro economics tend to dominate the relationships specified, with Keynesian multiplier relations cropping up on occasion. Cobb-Douglas functions are popular as they can give you uniquely determined parameter values through their calculation. However, CES and LES functions are now more common, but they do not allow the model to determine elasticities endogenously, rather you need exogenous values for the parameters in order to make the functional forms work in the CGE model. Importantly, the share of economic activity that each sector contributes or uses is ''predetermined'' by these equations and it is limited because of the numerous convexity assumptions. More specifically the input shares of sectors will not change if the elasticities of substitution are all equal to one<ref>With elasticities unequal 1, however, you do get lots of substitution effects, which the full employment models exploit.</ref>, and similarly the consumption shares will not change if demands are homothetic with unit price elasticities (again Cobb-Douglas). So a CGE model could not predict, nor deal with any major structural changes like China’s recent boom in manufacturing, or India’s booming service outsourcing sectors. Simply because those productive parts of the economy are given a set percentage of the nations output in the benchmark, that will not change. To make adjustments to this, one would have to post facto change these shares exogenously, but it cannot be incorporated endogenously. The model as such can only deal with small changes within the given structure of the benchmark economy, which is what it was originally built for. It cannot react to changes in the structure of the economy, or predict those changes, without someone specifying how the economy will change over time exogenously, as well as a priori, no matter the functional form. The great advantage of the method is the ability to trace a large number of functional forms in a numerical model, but the value add of the method comes from careful considerations of these equations. ====Behavioural Equations==== Behavioral equations are the third tier in CGE models, and were not widely specified until after 1980. Their mathematical specification runs along the same lines as the functional forms, but addresses single agents rather than institutions. These relationships are usually explained first in CGE models today, as they conform to, or are reminiscent of, [[Arrow-Debreu]] micro models, with isoquants and isocost lines tangentially touching budget constraints of a utility maximizing agent. As such they play an important rhetorical part in portraying the ‘ground work’ – or the first few pages – in a CGE model as resembling the formal [[general equilibrium]] model. However, these equations feed into the functional forms, which in turn equal under the macro balancing equation. Again, if the equations chosen do not correspond to the CES forms, then the value of the parameters used, need to be specified exogenously. ===Closure=== Given the solution based nature of the CGE model, every equation used in the SAM must necessarily have an exogenous and an endogenous variable. The exogenous is fixed ''a priori'', and the endogenous will then change from its benchmark value, according to the functional forms and Behavioural Equations prescribed, when the exogenous variable is shocked. This may appear to be standard macro modeling practice, but it is important because in the top tier, and throughout, the decision of exogeneity sets the direction of causality. <blockquote>"Closure is CGE jargon for assigning causality in a model. The practice often boils down to deciding which variables should be exogenous or endogenous (or which equations should be included or excluded) to make sure the model is ‘closed’ or has a solution, like a typical problem from high school algebra." (Taylor and von Arnim 2007: 29, footnote 37)</blockquote> ‘Closure’ must be prescribed for each endogenous variable introduced to the SAM as each one must have an exogenous counterpart. In the top tier of the model, decisions about whether savings adjust to investment, or investment adjust to savings, are crucial separators between neoclassical and Keynesian economics at the outset. The same applies to decisions of whether government funds adjust to tax receipts, or vice versa, and most controversially whether the exchange rate adjusts to hold current accounts constant, or an alternative behavior for the balance of payments exists. Some modellers hold employment and the trade balance fixed; others allow these to vary. ===Closure matters for causality and results=== Taylor and von Arnim (2007) tested the CGE trade model predictions for the Doha round, and running the same model with identical functional forms and behavioural equations it was clearly shown that closure is not model independent. In fact results came out diametrically opposite for all country groups, with differences ranging from -1% to +100%. This means that the choice of exogenous variables influence the model outcome to a very large degree. Almost all models test only one closure method, despite the fact that there are as many closures to a model as there are variables to the power of two. As such a model with just the macro balancing equations has eight distinct closures, all of which could yield different results for the model. Taylor and von Arnim’s model includes 125 equations, and has a potential 15,625 closures, of which only a few were tested. The World Banks model in turn has some 50,000 equations, all of which are closed idiosyncratically to their model, with two and a half billion possible closures. Admittedly it would not be practical to consider different closures for every single variable, but one might expect that rigour prescribe some tests for robustness by changing the exogenous variables in the macro balancing equation and maybe a few major sectors. ‘Closure’ punctuates the point that the CGE model is solvable or computable simply by counting equations and endogenous variables, and solving the simultaneous equations. More than that, it prescribes causality based purely on the theoretical preference of the model builder, and there is no right or wrong standard one can apply. ====Balanced Closure or Neutral Closure==== Much of the CGE literature post 1990 has included what is referred to as ‘balanced’ or ‘neutral’ closures. This method does not address the issue raised above about neutralizing the closure so that choosing the exogenous variable is model independent, nor is it a closure in the normal sense (Mitra-Kahn 2008: 65-66). In fact it is a distributional 'bias' which has to be closed just as above by choosing an exogenous and endogenous component. It does not change the previous closure, nor does it endogenize any of the previously chosen exogenous variables. After the model is closed, as described above, three more equations are introduced, the first defines the "total absorption" [A] ability of the economy. This equation will redistribute the effect of any exogenous shock (i.e. the CGE simulation) upon the three elements of the macro balancing equation according to the parameters in [A}, so that when the model is made, and one particular part of the economy is predicted to be impacted in a large degree by the functional forms and behavioural equations defined by the modeler, this ''ex-post'' adjustment changes that effect. Two further expression for the impact on (G-T) and (I-S) are usually created, and then the effect on (X-M) will receive the remainder<ref>One could equally add a third equation for the household import/export share of absorption, but would then need a fourth equation to ensure that all three parts of A equals zero. Sometimes this method is followed not for the balanced closure but for the normal macro closure, and the variable which equals zero is often referred to as ‘WALRAS’S in the programming code. (See Löfgren et al. (2002) p. 39 for an example).</ref>. All three ‘balanced closure’ equations have to be closed themselves, which is done by getting [A] from the macro balancing equation, or exogenously and setting the proportions exogenously usually from the base year. So the absorption ability of sectors are fixed for the duration of the model, and then the standard method is to give each element an equal share of any effect arising from the CGE model. “This ‘balanced closure’ [method] aims at distributing the burden of policy changes equally among all final demand aggregates” (Wobst 2002: 8). ===Parameters=== <blockquote>"Models are dense with parameters… Often no estimates exist of required parameters, so they are guessed; or multiple estimates exist that are contradictory. In the economic literature different estimation procedures, different data series, and different theoretical concepts are used, making it very difficult to use estimates drawn from the literature." (Kehoe, Srinivasan and Whalley 2005: 10)</blockquote> Every functional form and behavioral equation has a number of parameters, all of which have to be quantified before the benchmarked and closed CGE model is used<ref>If the CGE model is aimed at calculating cross market elasticities (like Johansen 1960), and uses only functions of a Cobb-Douglass nature then the models parameters can be estimated (based on the benchmark) in the model.</ref>. Model builders ''choose'' the magnitude of the changes the model will predict, by setting parameters. Again parameter values are not generally specified in papers, which focus on the ‘results’. A majority of parameters come from literature searches and best effort guesstimation of what a ‘realistic’ value should be, as each model builder chooses the parameters idiosyncratically, and can hide important elasticity values, without any issue. Particularly controversial are price [[Price elasticity of demand|elasticities of demand]] in trade models, where little agreement can be found even when elasticities are disclosed. ====Calibration==== "Calibration" is the method by which model builders try to ‘test’ their parameters, and most models will make mention of having performed this, although the results and related changes are rarely, if ever published. Using the closed benchmark economy, and the assumed parameters, the exogenous variables of the model are input to see if the endogenous solutions correspond to the benchmark data. If the margin of error is ‘acceptable’ then the parameters (and thus elasticities) are deemed sufficiently realistic for modeling purposes. The margin of error allowable is up to the model builder, and no solid standards exist. An Alternative method for calibrating models, consists of setting the base year of the benchmark economy in the past, and then running the real changes in exogenous variables for the years to date to see if the endogenous variables still approach the historical observations. This practice was pioneered by Johansen, but is rarely used today<ref>Another alternative is to econometrically estimate the parameters, a method favoured by Jorgenson</ref>. <blockquote>"Calibration inevitably implies subjective judgment by the calibrator. How is this to be squared with econometric rigor?" (Kehoe, Srinivasan and Whalley 2005: 9).</blockquote> Most models have to be calibrated, but the problem is not unique to CGE modeling, but present across empirical modelling. The problem is that CGE models are inundated with parameter choices and they can have large effects, but the calibration results themselves are highly dependent on the form of closure, and multiple closures are generally not tried, so it is not clear that one particular calibration is better than another. <blockquote>"The standard practice is not to adjust the parameter (elasticity) values if the base simulation misses ‘too far’ from the base year SAM. Rather than that, modelers tend to adjust the intercept parameter to make the parameter value of their choice affect the result to match the base year SAM, which means the size of the impact is still in the modeler’s control60. What the size of these errors are, what effect they have, and whether the calibrated specification even makes sense, are all issues which should be raised in model papers, but never is. The range for mistakes, both conceptually and for results, is potentially enormous." (Mitra-Kahn 2008: 71)</blockquote> ===Running the CGE model=== Once all the above choices are made, the simulations solve a set of equations which have been perturbed from the ones that generate the base solution. Since some of the equations can be non-linear you have to do more to solve them than just invert a matrix. You can get a linear approximation to the solution of the perturbed system by using the [[Jacobian]] for the base solution but people usually want to be "exact." The model will re-distribute flows as they result from the exogenous shock within the model, and repatriate dead weight losses, but not simulate economic growth unless the exogenous variables of the macro balancing equation are exogenously set to increase. If the macro balancing equation remains stationary, the economy must adjust all its prices to fit the macro equilibrium, no matter the micro behavior. ====Static Dynamics==== All CGE models are solved simultaneously for a single or multiple (if in a chain model) time period, despite claims to dynamic CGE models. [[comparative statics|comparative-static]] models, model the reactions of the economy at only one point in time. For policy analysis, results from such a model are often interpreted as showing the reaction of the economy in some future period to one or a few external shocks or policy changes. That is, the results show the difference (usually reported in percent change form) between two alternative future states (with and without the policy shock). The process of adjustment to the new equilibrium is not explicitly represented in such a model<ref>Details of the closure (for example, whether capital stocks are allowed to adjust) lead modellers to an artificial distinction between '''short-run''' and '''long-run''' equilibria when discussing the model results.</ref>. What is referred to as dynamic CGE models aim to trace each variable through time -- often at annual intervals. These models require for instance that future changes are predicted for all exogenous variables, not just those affected by a possible policy change. The dynamic elements may arise from partial adjustment processes or from stock/flow accumulation relations: between capital stocks and investment, and between foreign debt and trade deficits. Generally, an equation is specified exogenously to the whole model to explain how much growth there is in the economy and in some sectors to allow the model to 'grow'. These models were labelled 'lurching' equilibrium models when they were invented in [[Computable general equilibrium#Adelman-Robinson (1978) - Chain Models|1978]] and they are set up in a chain of models where an initial exogenous shock gives an endogenous solution to the first model. This solution serves as exogenous variables for a second model, whose endogenous results become the exogenous variables for the first. This creates a cycle of step-by-step static solutions to each CGE model, and these are termed 'long term' or 'dynamic' CGE models. These are not dynamic in the strict sense, and as there is no adjustment mechanism in the CGE model, the model is hopping (or lurching) from static equilibrium solution to static equilibrium solution. ==History of the core CGE model== The beginnings of CGE (or ‘empirically estimated economy-wide’) modeling started with the work of [[Wassily Leontief]] in the 1930’s when he was fresh out of Harvard and working for the [[Bureau of Labor Statistics]] (BLS). At the BLS Leontief attempted to set up a ''Tableu'' of input-output accounts for the US economy that encompassed “all branches of industry, agriculture, and transportation [and] also the individual budgets of all private persons” (Leontief 1951: 11). At the end of the Second World War the BLS were asked to forecast steel demand, in a nonwar scenario. To do this, the BLS took Leontief’s input-output estimates of the 1939 US economy<ref>These estimates remain unpublished, but are referred to by Leontief himself in The new Palgrave: A dictionary of Economics (Eatwell et al. 1987) in the “input-output analysis” section. They are included in a 1947 pamphlet entitled ''Full Employment Patterns 1950'' (BLS, 1947) inventoried at the California Department of Industrial Relations, and were partly included in a published article by Cornfield et al. (1947).</ref> and introduced demand and behavioral assumptions between variables in the framework. This input-output model was one of the few forecasts which suggested that steel demand would not fall as a result of the war ending, but would be strong – which turned out to be correct. Leontief (1951b) argued that this was one of the reasons why this form of analysis became important to the U.S. administration already then, and academics started adopting multi sector input-output models for economy wide analysis. Hollis B. Chenery was Leontief’s Ph.D. student at Harvard, and during the 1950’s he (among other things) carried on working in the input-output framework which Leontief had formulated. The work included new behavioral functions and demand systems which could be used to simulate full economy responses to changes, much like the BLS project. What Chenery, and others at the time were working on, was then (independently) formalized into a consistent framework by Leif Johansen in Norway. ===Leif Johansen (1960) - The First 'CGE' model=== Leif Johansen (1960) is widely credited as the originator of the CGE model, although various parts of the literature ignored his work for a stretch of time. Johansen’s aim was to analyze the “deviations from uniformity in the growth process” (1960: 5, his emphasis), in stark contrast to the typical Arrow-Debreu general equilibrium or growth theory at the time, which talked of a balanced growth across sectors. To do so, he constructed a ‘fixed output stochastic model’ around the data given by the definitions of the national accounting system. First he chose a ‘base year’ from where all the starting figures would come, with 1950 serving as his benchmark. The reason for the static nature of the base year was that more years of full data were generally not available, and even if time series were available, “the structure [of the economy] would have significantly changed over the period” (Johansen 1960: 60). So Johansen set out to create a data set for the economy at one specific point in time, which would have a matrix form of the national account. Therefore he used the Input-Output method. Once all the data had been entered into the matrix, the rows and columns did not all equal, so Johansen explicitly edited the data, particularly in the household sector to make the matrix balance<ref>See pages 65-66 in Johansen (1960) for explicit changes to make the household account ‘add up’.</ref>. This is what today is referred to as [[social accounting matrix#Benchmarking|benchmarking]] in the [[social accounting matrix]] (SAM), which forms the empirical core of the CGE model. Johansen's model proved successful, despite what he termed unrealistic assumptions of suppliers operating in perfect competition and a marginal equality between wage rates and marginal values of output, both “realistically unknown” (Johansen 1960: 171). The results of the model were not optimal, nor in the spirit of [[general equilibrium]] theory (be it [[Walras]] or [[Arrow-Debreu]]), but it was a balanced macro model (not a ''balanced growth'' model), successfully solved with linear equations. Johansen wanted to estimate the elasticities of substitution between sectors labor and capital movements, to explain “relationships in Norwegian reality” (1960: 3), and in doing so he invented a method for economic analysis through a combination of the national accounts, macro economic balancing equations and input output analysis – that is what made this the first ‘CGE’ model. ===Taylor-Black (1974) - The original CGE model=== The first paper that explicitly built “a model similar to the one developed in Leif Johansen’s” book and used it on a new problem was Taylor and Black (1974: 37) who applied it to Chile<ref>This is shown to be the first CGE paper, with original drafts in circulation as early as 1971, while all the contemporary work on CGE models reference this article as the original framework (Mitra-Kahn 2008: section 1.3)</ref>. Taylor and Black (1974) were critiquing the concept of Effective Rates of Protection, and the use of ''partial equilibrium'' models. They argued that this approach could not capture the widespread effects that a tariff change could have on anything from exchange rates and wage demands through world prices. So they proposed a “local, but feasible, method of calculating resource pulls which takes both general equilibrium effects and all relevant data into consideration… [which would] analyze the effects of exogenous parameter changes on a market or set of markets allegedly in equilibrium” (1974: 38) – effectively the same method Johansen used. While Leontief had to build his own model of how the economy hung together, Taylor and Black (like Johansen) used a simplified version of the national income accounts. The model set up data for 35 sectors, through a number of equations, which could be re-written into a social accounting matrix if so needed. The model had domestic demand and the Balance of Payments (BoP) which was assumed to be in deficit. Part of that BoP contributed to tax revenue (through tariff earnings) and part of it contributed to the investment of the economy as capital inflows. These equations together, provided the basic macro economic balancing equation: (I-S)+(G-T)+(X-M)=0. Following that, a number of behavioral and functional forms had to be specified to explain how labor, demand, prices (in wage terms), etc would react to a change in an exogenous variable. It was a typical modeling exercise, where some exogenous shock is thrown at a system (e.g. change the tariff rate) and the number of equations equals the number of endogenous variables in the model. They solved the linear equations, and as the endogenous variables are solved according to the new exogenous variable, they found the new equilibrium, defined by the macro “pre-specified balance” of leakages and injections equaling zero (Taylor and Black 1974: 47). This model could include disequilibrium by definition (as there was a fixed X < M in this model). The workings of the model was to have a number of macro equalities, which provided the matrix of equations with a benchmark towards which to ‘adjust’. That is what Johansen’s model, and Taylor and Black’s CGE model did. The decisions about those behavioral equations of agents, the functional forms for production, choice of exogenous (and thus endogenous) variables (one must adjust to the other), was where "theory, empirics and guesswork" came in (Mitra-Kahn 2008: 17). ===Robinson (1976) - WPE models=== <blockquote>"Any model which attempts to address distributional questions should endogenously determine both wages and prices. Wage and price endogenous general equilibrium models (WPE models) are currently available and can be implemented." (Robinson 1976: 123)</blockquote> WPE models became popular in the mid 1970's, and were implemented by setting prices and wages as endogenous variables to be solved in the CGE framework and choosing the appropriate exogenous variables which could be shocked to simulate a change in the economy - referred to as 'closure' choice in the literature. A large part of the reason for this focus was the fact that the [[World Bank]] had recently (in 1973) declared a war on poverty, so the development research was explicitly focusing on poverty and distribution at the time, and Robinson worked with the Bank. These models focussed on distribution, and not the explicit search for the adjustment of certain macro or micro variables which had been the aim of Johansen and Taylor-Black, but the ‘WPE closure’ did not include Johansen's assumption of prices being reflected as wages, which Johansen did to get the cross elasticities easily, and endogenously. ===Confusion (1978) - Books claiming to be 'first'=== Robinson and Adelman (1978) and Taylor-Lysy (1979) are generally hailed as the first work on CGE models<ref>See for example Devarajan & Robinson (2002) or (Adelman, interviewed by Grossbard-Shechtman and Gagnier. 2002: 110)</ref>, but this is a mis-representation. Both books were written under the supervision of Hollis Chenery at the World Bank, and the teams had a lot of cross fertilisation. Both scripts were finalised in 1978, and both claim the same intellectual heritage from Johansen (1960) and Taylor and Black (1974), thus not being separate or alternative models. Bourgignon et al. (1980) in their CGE model, briefly surveyed Adelman-Robinson (1978), and considered it a typical equilibrium model, with some quirks. "Their [Adelmand and Robinson] model is essentially a sequence of temporary equilibria mainly defined by a fixed structure of sectoral capital stocks and some exogenous parameters" (Bourgignoun et al. 1980: 22-3). ===Adelman-Robinson (1978) - Chain Models=== The Adelman-Robinson (1978) model was set up as three separate models (of which one was a CGE model), each solved one after the other. Of these models, they argued that “the pervasive importance for distribution of relative factor prices and product prices led us to formulate a wage- and price-endogenous CGE model” (Adelman and Robinson: 1978: 8) [[Image:Adelman-robinson-1978.jpg|frame|'lurching' CGE models; based on Adelman-Robinson (1976), in Mitra-Kahn (2008: 27): ]]. These WPE models have quite a few forerunners, and here Adelman and Robinson themselves classify WPE as a particular subset of CGE models. So in fact, they are building a CGE model, which will be placed between the two other models - and this was a very importan innovation. This idea of having a ‘chain of models’ where one a set of exogenous variables would be endogenous further down the chain, was formulated in Robinson (1976) and described in Adelman and Robinson (1978). It was described in both publications as “neither full neoclassical equilibrium nor full intertemporal equilibrium” (Robinson 1976: 125)<ref>In Adelman and Robinson (1978) these models are defined as “neither a full neoclassical general-equilibrium model nor a pure disequilibrium or partial equilibrium model” (1978: 9)</ref>. Rather it is defined as a "lurching equilibrium" model (Adelman and Robinson: 1976: 9). Consider the image from Mitra-Kahn (2008). The ‘Dynamics’ in this chain of models, consists of an initial exogenous shock to ‘Model 1’, and by solving a static or temporary equilibrium model, one gets an endogenous solution. The variables for this solution equal the exogenous variables required for the second link in the chain (here, the CGE model), and they are then fed into the CGE model, which again is solved as a static model. These solutions are equivalent to the variables needed for ‘Model 3’, which again is solved, providing the new variables for static model number 1, thus completing the circle. ‘Dynamics’ are reduced to solving one static model with another ''ad infinitum''. This process is repeated until enough ‘short runs’ have been added together for the model-builder to call it a ‘long run’ model. Later innovation then added an exogenous time-trend to be added for each iteration, but the whole result depends on the initial change which sets off the cycle. ===Innovation since 1986 - Rhetorical=== After the mid 1980's [[Applied general equilibrium]] (AGE) models, which were based on [[Arrow-Debreu]] [[general equilibrium]] theory, started their decline, and the method of CGE modelling took over. Since then work referred to as AGE or CGE has been empirically based on [[social accounting matrix|SAM's]], with an equal set of equations and unknown variables, with exogenous and endogenous variables, which are shocked to get a static result for any given base year in the [[social accounting matrix|SAM']], and never on solving a market clearing price vector within the [[Arrow-Debreu]] framework, so the change that has occurred is that the term 'AGE' has become synonymous with 'CGE' and this has created an illusion that CGE models are based on Arrow-Debreu general equilibrium theory, when in fact they are macro balancing models, and have been ever since Johansen's first attempt in 1960. The core model has remained the same, although its application has spread far beyond macro and micro variables adjusting - which remain the focus of economics research. Today work on global warming, environmental effects, project assessment, terrorism analysis (in one instance at least) and other issues which require the impact of multiple variables to interact across a system use the CGE model as its base. ==AGE and CGE models== CGE models are not [[Arrow-Debreu]] [[general equilibrium]] models like the [[applied general equilibrium]] (AGE) models of the 1970's, although in the modern literature they are often referred to as [[AGE model]]s. ==CGE modeling in different countries== There is a vast difference in how CGE models were implemented, and how they are computed and often these distinctions are based on geopgraphy and domestic preferences, but all the different variants of CGE models fall under the same core model, whose history is outlined above. Some countries which have very rich histories of CGE modeling are Norway (Leif Johansen's homeland), Australia and the USA. ==The CGE modeling community== The CGE modeling community has revolved around a small set of big institutions, which have included the World Bank, The International Food and Policy Research Institute (IFPRI), The GTAP project at Purdue University and Monash University in Australia. ==References== {{reflist|2}} ==Further reading== * Adelman, Irma and Sherman Robinson (1978). Income Distribution Policy in Developing Countries: A Case Study of Korea, Stanford University Press * Bouët, Antoine, 2008, [http://www.ifpri.org/PUBS/fpreview/pv08.asp The Expected Benefits of Trade Liberalization for World Income and Development: Opening the "Black Box" of Global Trade Modeling], IFPRI Food Policy Review '''8''' * Dervis, Kemal, Jaime de Melo and Sherman Robinson (1982). General Equilibrium Models for Development Policy. Cambridge University Press. * Dixon, Peter, Brian Parmenter, John Sutton and Dave Vincent (1982). ORANI: A multisectoral model of the Australian Economy, North-Holland. * Dixon, Peter, Brian Parmenter, Alan Powell and Peter Wilcoxen (1992). Notes and Problems in Applied General Equilibrium Economics, North Holland. * Dixon, Peter (2006). Evidence-based Trade Policy Decision Making in Australia and the Development of Computable General Equilibrium Modelling, CoPS/IMPACT Working Paper Number G-163 [http://www.monash.edu.au/policy/elecpapr/g-163.htm] * Ginsburgh, Victor and Michiel Keyzer (1997). The Structure of Applied General Equilibrium Models, MIT Press. * Kehoe, Patrick J. and Timothy J. Kehoe (1994) "A Primer on Static Applied General Equilibrium Models," Federal Reserve Bank of Minneapolis Quarterly Review, 18(2) [http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=258]. * Kehoe, Timothy J. and Edward C. Prescott (1995) Edited volume on "Applied General Equilibrium," Economic Theory, 6. * Mitra-Kahn, Benjamin H., 2008, "[http://www.newschool.edu/cepa/publications/workingpapers/SCEPA%20Working%20Paper%202008-1%20Kahn.pdf Debunking the Myths of Computable General Equilibrium Models]", ''SCEPA Working Paper'' '''01-2008''' * Piermartini, Roberta and Robert Teh (2005). Demystifying Modelling Methods for Trade Policy, Discussion Paper No. 10, World Trade Organization, Geneva. [http://www.wto.org/english/res_e/booksp_e/discussion_papers10_e.pdf] * Shoven, John and John Whalley (1984). Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey. Journal of Economic Literature, vol.22(3) 1007-51 * Shoven, John and John Whalley (1992). Applying General Equilibrium, Cambridge University Press. ===See also=== * [[Applied general equilibrium]] * [[Dynamic stochastic general equilibrium]] * [[General equilibrium]] * [[Input-output model]] * [[Model (macroeconomics)]] ---- [[Category:General equilibrium and disequilibrium]]