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Dynamic General Equilibrium Model with Uncertainty: Uncertainty regarding the future path of the economy

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  • Stephen Pratt
  • Adam Blake

Abstract

This paper develops a new method for incorporating uncertainty within a computable general equilibrium (CGE) model. The method involves incorporating uncertainty into the model by formulating different states of the world or paths that the economy may take. The risk then is that on one or more of the paths, there may be an external demand shock, for example, an exogenous shock in tourism demand. The multi-sector forward-looking CGE model with risk shows the impact of uncertainty on the economy and how households and industry respond to the presence of uncertainty. The results show that, where there is an asymmetric shock, the possibility of a future tourism demand shock creates a welfare loss. The welfare gains along the non-shocked path are a result of household's risk aversion and their substituting resources away from the shocked path. The difference in the monetary values of the welfare on the different paths can be interpreted as the ‘price’ of the risk. It is the price households would pay to remove the possibility of the tourism shock. Therefore, this research was able to quantify the monetary value of the risk. This method can be used in scenario modelling for other adverse contingent events, such as the uncertainty of climate change impacts, and agriculture production risks.
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  • Stephen Pratt & Adam Blake, 2007. "Dynamic General Equilibrium Model with Uncertainty: Uncertainty regarding the future path of the economy," EcoMod2007 23900070, EcoMod.
  • Handle: RePEc:ekd:000239:23900070
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    Cited by:

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    2. Hepburn, Cameron & Mealy, Penny, 2017. "Transformational Change: Parallels for addressing climate and development goals," INET Oxford Working Papers 2019-02, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, revised May 2019.
    3. Asiya Maskaeva & Mgeni Msafiri, 2021. "Youth unemployment hysteresis in South Africa: Macro-micro analysis," WIDER Working Paper Series wp-2021-20, World Institute for Development Economic Research (UNU-WIDER).
    4. Féménia, Fabienne & Gohin, Alexandre, 2010. "Faut-il une intervention publique pour stabiliser les marchés agricoles ? Revue des questions non résolues," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement (RAEStud), Institut National de la Recherche Agronomique (INRA), vol. 91(4).
    5. Trond G. Husby & Elco E. Koks, 2017. "Household migration in disaster impact analysis: incorporating behavioural responses to risk," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 87(1), pages 287-305, May.
    6. Femenia, Fabienne, 2010. "Impacts of Stockholding Behaviour on Agricultural Market Volatility: A Dynamic Computable General Equilibrium Approach," Journal of International Agricultural Trade and Development, Journal of International Agricultural Trade and Development, vol. 59(3).
    7. Inchausti-Sintes, Federico, 2015. "Tourism: Economic growth, employment and Dutch Disease," Annals of Tourism Research, Elsevier, vol. 54(C), pages 172-189.

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    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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