A generic approach to investment modelling in recursive dynamic CGE models

Hom M Pant

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

Abstract: It is a common practice in recursively dynamic CGE models to maintain static expectations. Consequently, investors take current rates of return as expected future rates of return. The vexing problem with this approach is that no matter how we allocate investments across sectors and regions in the current period, it is not possible to bring the expected rates of return to equality once the equilibrium is displaced. To deal with this problem all recursively dynamic CGE models have resorted to some complex mechanisms to allocate investments across sectors and regions. By drawing on the inverse relationship between the future capital stock and its marginal productivity, this paper establishes an inverse relationship between the expected future rates of return and current investment levels and this approach has been applied to the static GTAP model (version 6.2). By doing so this paper provides an alternative to the GTAP-Dyn model.

Keywords: recursive dynamic CGE model; static expectation; expected rates of return; investment allocation (search for similar items in EconPapers)
JEL-codes: C58 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2015
New Economics Papers: this item is included in nep-cmp
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