A Multi-Industry Computable General Equilibrium Model with Dynamic Investor and Consumer Behaviour

Abstract

This thesis pursues three main objectives: * to develop a multi-industry computable general equilibrium (cge) model of the New Zealand economy incorporating inter-temporal optimising behaviour with explicit financial income and expenditure flows integrated with real activity * to show the computational flexibility of the dynamic cge model * to illustrate the range and detail of dynamic cge model analysis The construction of a cge model with forward-looking investment, consumption and labour supply behaviour is described. Model-consistent behaviour is detailed, with the expectations of private investors and consumers being fulfilled in the outcome of the model over all future periods of time. Explicit financing constraints for the government and the domestic private sector are included, with an economy-wide constraint imposed. Any deficiency in national savings arising from the income and expenditure flows of these two sectors is thus consistent with such flows to and from the overseas sector. The Gempack software package is applied to obtain model solutions. The expression of model relationships in linear form to facilitate such solution is noted. The generation of a multi-period steady-state solution from a single-period input-output data-set is presented. Flexibility is reflected by the ease with which the number of periods in the model can be adjusted. The inclusion of alternative behavioural specifications is provided as further evidence of the flexibility of the modelling environment. Alternative investor behaviour involves either the equalisation of rates of return or the maintenance of real profit rates in each industry. Alternative consumer behaviour focuses on the endogeneity or otherwise of labour supply. Investigations of the impact of relative price shocks, tax policy options, anticipated shocks as well as temporary shocks are presented. In each case, simulations are designed and commentary is focussed on highlighting particular features of the dynamic cge model and behaviour inherent therein. The illustrative applications of the model display the response of agents as critically dependent on movements in relative prices of commodities, resources and assets. The homogeneity properties of the model are explored and the crucial nature of the exogenous status of particular variables is stressed.