Sector-Specific Investment in a MRIO CGE Model

Concerns with the measurement of systemic risk are heightened in today’s interconnected, post-GFC world. However, as it is recognised by the academic community, empirical analyses quantifying the impact of shocks to the world economy on agent risk are scarce if not inexistent. A widely used framework for performing such analysis is computable general equilibrium (CGE) modelling. This paper documents work in progress on developing a global CGE model. A key challenge in the development of the global model lies in the combining of the strengths of the GTAP and WIOD databases. Contrary to the GTAP database, the World Input-Output Database (WIOD) does not rely on the common sourcing assumption but recognises that demand in a region for a given commodity from another region may differ across users. On the other hand, limited data are available in WIOD on taxes, tariffs and international transport margins, while the GTAP database has all the necessary data to incorporate a realistic structure of these variables into the model. The main purpose of the simulations in this paper is to illustrate the usefulness of applying a multi-region input-output database to a CGE model. The analysis shows that, at the macroeconomic level, the advantage of a real sourcing-differentiated database is relatively insignificant. However, at the industry level, it can result in significant differences in prices that are relevant in analysing policy reforms in the global supply chain.