A Johansen type general equilibrium model of New Zealand with some applications

Abstract

The subject of this thesis is the construction and use of a twenty-six sector comparative, static-price, endogenous, general equilibrium model of New Zealand, which is of the Johansen type, code-named JOANNA. The need for such a model in the contemporary New Zealand scene for policy analytic work concerned with resource allocation, serves as the starting point of the study. After defining precisely what is meant by a Johansen type model, there follows a review of the development of this class of models from their beginnings in 1960 through to 1982. Emphasis is given to the way in which modelling of international trade has improved and, also, to the growing sophistication and wide-ranging applications of such models. A comparison is made of the general solution routines employed in solving Johansen type models as opposed to general equilibrium models solved in level form. A detailed outline of the algebraic structure and theoretical assumptions of the JOANNA model follows, with two versions of the model being developed, namely a short and a long-run version. The main difference between these two versions lies in their treatment of sector capital stocks which are considered to be sector specific and fixed in the short run but malleable and homogeneous in the long run. Empirical implementation of the model, both in terms of its data input and explicit solution routine, is dealt with in subsequent chapters in considerable detail. Specific applications of the model form the subject of chapters seven and eight. Firstly, it is shown that the model may be used to explore the macro and sectoral implications of alternative fiscal packages, each involving a certain cut in income taxes but financed by either one of four indirect taxes or a cut in government consumption expenditure. In the second application, the model is used to explore the implications of a tariff cut on the textiles, apparel and leather sector. Both the short and long run implications of such a policy change are investigated and the sensitivity of the short run results to variations in key parameter settings is examined. Areas where the model's structure could be usefully improved are investigated in the final chapter which also examines the question of the credibility of JOANNA model results and concludes by suggesting the contemporary policy areas where the model could be of assistance.