Current Account Balances, Exchange Rates, and Fundamental Properties of Walrasian CGE World Models: A Pedagogical Exposition

André Lemelin

Abstract


This paper addresses theoretical aspects of global multinational trade models of the computable general equilibrium (CGE) type. We define and discuss the concepts of model homogeneity, model closure rules, and consistency in calibration. We examine and illustrate these issues using a highly simplified skeleton model derived from the PEP-w-1 CGE world model, to represent the essential structure of world trade models. Model closure issues, including how to correctly fix current account balances, are scrutinized. We also consider the role of nominal exchange rates in Walrasian “real” CGE models (without money), which can be, and often are written without exchange rates. But when exchange rates are present, we show that a model can be solved equivalently by exogenously fixing either exchange rates (FE) or regional price indexes (FP), and we weigh the advantages of either closure for economic interpretation of simulation results. The model is implemented in GAMS and is made available to readers as a supplementary download.


Keywords


Computable general equilibrium models (CGE); Global trade models; CGE model closures; Current account balance; Exchange rate

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DOI: http://dx.doi.org/10.21642/JGEA.020104AF

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Copyright (c) 2017 André Lemelin