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New Household Saving Behavior in the Dynamic GTAP model

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  • Golub, Alla
  • McDougall, Robert

Abstract

In the dynamic GTAP model (GTAP-Dyn) saving is a fixed proportion of income in each region. There are two unwelcome implications of this. First, net foreign positions grow without bound in GTAP-Dyn simulations. The second problem is that as economies with high savings rates, like China, grow, there is a glut of global savings and, as a result, of investment and capital in the world. Because of excessive investment, rates of return to capital fall without bound. This paper documents new household saving behavior in the dynamic GTAP model. In this work we adopt very practical approach motivated by the stylized fact that gross foreign assets and liabilities do not diverge through time in reality nearly as much as in standard GTAP-Dyn. We modify the theoretical structure of the GTAP-Dyn so that the saving rate in each region is endogenous and is a function of the ratio of wealth to income. New theoretical structure supports balanced growth scenarios, stabilizes global rate of return to capital, and prevents net external assets or liabilities from growing implausibly large.

Suggested Citation

  • Golub, Alla & McDougall, Robert, 2006. "New Household Saving Behavior in the Dynamic GTAP model," Conference papers 331550, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331550
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    References listed on IDEAS

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    1. Kehoe, Timothy J., 2002. "An Evaluation of the Performance of Applied General Equilibrium Models of the Impact of NAFTA," Conference papers 331066, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
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    3. Francois, Joseph & Bradley McDonald, 1996. "Liberalization and Capital Accumulation in the GTAP Model," GTAP Technical Papers 310, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    4. Timothy J. Kehoe, . "An evaluation of the performance of applied general equilibrium models of the impact of NAFTA," Staff Report, Federal Reserve Bank of Minneapolis.
    5. Edwards, Sebastian, 1993. "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1358-1393, September.
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