Computable General Equilibrium - Comparative-static and Dynamic CGE Models

Comparative-static and Dynamic CGE Models

Many CGE models are comparative-static: they 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, although details of the closure (for example, whether capital stocks are allowed to adjust) lead modellers to distinguish between short-run and long-run equilibria.

By contrast, dynamic CGE models explicitly trace each variable through time—often at annual intervals. These models are more realistic, but more challenging to construct and solve—they 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.

Recursive-dynamic CGE models are those that can be solved sequentially (one period at a time). They assume that behaviour depends only on current and past states of the economy. Alternatively, if agents' expectations depend on the future state of the economy, it becomes necessary to solve for all periods simultaneously, leading to full multi-period dynamic CGE models. Within the latter group dynamic stochastic general equilibrium models explicitly incorporate uncertainty about the future.