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A generic approach to investment allocation in recursively dynamic CGE models

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  • Pant, Hom

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.

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  • Pant, Hom, 2015. "A generic approach to investment allocation in recursively dynamic CGE models," Conference papers 332649, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332649
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    References listed on IDEAS

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    1. Peter B. Dixon & Maureen T. Rimmer, 1998. "Forecasting and Policy Analysis with a Dynamic CGE Model of Australia," Centre of Policy Studies/IMPACT Centre Working Papers op-90, Victoria University, Centre of Policy Studies/IMPACT Centre.
    2. David Stern, 2011. "Elasticities of substitution and complementarity," Journal of Productivity Analysis, Springer, vol. 36(1), pages 79-89, August.
    3. Charles Blackorby & Daniel Primont & R. Russell, 2007. "The Morishima gross elasticity of substitution," Journal of Productivity Analysis, Springer, vol. 28(3), pages 203-208, December.
    4. Sato, Ryuzo & Koizumi, Tetsunori, 1973. "On the Elasticities of Substitution and Complementarity," Oxford Economic Papers, Oxford University Press, vol. 25(1), pages 44-56, March.
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