A Dynamic Global CGE Model with a GVAR-based Baseline

With one crisis every 58 months on average, statistically speaking the beginning of the next crisis would be around April 2015 and would end by March 2016. This paper documents the theoretical structure of a dynamic global CGE model, as well as illustrates the potential economic consequences of another global crisis on the world economy. The two main reasons for developing a dynamic model is (1) to identify transition paths of variables between the initial equilibrium and the post-simulation equilibrium; and (2) to incorporate the convergence speed of out-of-steady state growth paths for specific variables. The first – transition paths – are particularly useful when the study has an explicit interest in inter-temporal aspects of exogenous variables (e.g. investment phasein) or endogenous variables (e.g. inflation pattern). The second – convergence speed – helps improve the credibility of predictions by allowing lagged adjustments to be introduced into the model (e.g. in investment and/or in the labour market). The calibration of the global dynamic model involves developing baseline growth paths for each of the regional economies that are globally consistent. Development of a world baseline include currently introducing demographic as well as real GDP projections in each region. The paper analyses the policy scenario applying interval-differentiated shocks in both the baseline and in the counterfactual simulations. This allows taking full advantage of quarterly GDP forecasts produced by our in-house global VAR model that is consistent with our set of countries.