An overview of the GCubed multicountry model

The G-Cubed multi-country model was developed by McKibbin and Wilcoxen (1993a) and has been updated in McKibbin and Wilcoxen (1998). It is an intertemporal general equilibrium model. It combines the approach taken in the earlier research of McKibbin and Sachs (1991) in the McKibbin-Sachs Global model (MSG model) with the disaggregated, econometrically-estimated, intertemporal general equilibrium model of the US economy by Jorgenson and Wilcoxen (1990).

G-Cubed has been constructed to contribute to the current policy debate on environmental policy and international trade with a focus on global warming policies, but it has many features that will make it useful for answering a range of issues in environmental regulation, microeconomic and macroeconomic policy questions. It is a world model with substantial regional disaggregation and sectoral detail. In addition, countries and regions are linked through trade and financial markets. G-Cubed contains a strong foundation for analysis of both short run macroeconomic policy analysis as well as long run growth consideration of alternative macroeconomic policies. Budget constraints are imposed on households, governments and nations (the latter through accumulations of foreign debt). To accommodate these constraints households and firms are assumed to use the model to generate forecasts of future economic performance and use these projections in their planning of consumption and investment decisions. The response of monetary and fiscal authorities in different countries can have important effects in the short to medium run which, given the long lags in physical capital and other asset accumulation, can be a substantial period of time. Overall, the model is designed to provide a bridge between computable general equilibrium (CGE) models that traditionally ignore the adjustment path between equilibria and macroeconomic models that ignore individual behaviour and the sectoral composition of economies.

G-Cubed is still in the process of development but it is already a large model. In its current form it contains over 6,000 equations and 110 intertemporal co-state variables. The key features of G-Cubed are summarized in Box

8.1. The country and sectoral breakdown of the model are summarized in Box

8.2. The range of countries modelled to date include the United States, Japan, Australia, New Zealand, the rest of the OECD, China, oil exporting developing countries (OPEC), Eastern Europe and states of the former Soviet Union (EFSU), and all other developing countries (LDCs)) with 12 sectors in each region. There are five energy sectors (electric utilities, natural gas utilities, petroleum processing, coal extraction, and crude oil and gas extraction) and seven non-energy sectors (mining, agriculture, forestry and wood products, durable manufacturing, non-durable manufacturing, transportation and services).

This disaggregation enables us to capture the sectoral differences in the impact of alternative environmental policies.

A full theoretical outline of the model is contained in the Appendix. Here we will summarize the main behavioural assumptions in the model.

Box 8.1 Summary of main features of G-Cubed

• Specification of the demand and supply sides of economies;

• Integration of real and financial markets of these economies;

• Intertemporal accounting of stocks and flows of real resources and financial assets;

• There is extensive econometric estimation of key elasticities of substitution from disaggregated data at the sectoral level;

• Imposition of intertemporal budget constraints so that agents and countries cannot forever borrow or lend without undertaking the required resource transfers necessary to service outstanding liabilities;

• Short run behaviour is a weighted average of neoclassical optimizing behaviour and ad hoc 'liquidity constrained' behaviour;

• The real side of the model is disaggregated to allow for production and trade of multiple goods and services within and across economies;

• Full short run and long run macroeconomic closure with macro dynamics at an annual frequency around a long run Solow/Swan/Cass neoclassical growth model;

• The model is solved for a full rational expectations equilibrium at an annual frequency with a horizon of more than a century.

Each economy or region in the model consists of several economic agents: households, the government, the financial sector and firms in the 12 production sectors listed above. The behaviour of each type of agent is modelled. Each of the 12 sectors in each country in the model is represented by a single firm in each sector that chooses its inputs and its level of investment in order to maximize its stock market value subject to a multiple-input production function (defining technological feasibility) and a vector of prices it takes to be exogenous. For each sector, output is produced with inputs of capital, labour, energy, materials and a sector-specific resource. The nature of the sector-specific resource varies across sectors. For example in the coal industry it is reserves of coal, in agriculture and forestry/wood products it is land that is substitutable between these two sectors.

Energy and materials are aggregates of inputs of intermediate goods. These intermediate goods are, in turn, aggregates of imported and domestic commodities that are taken to be imperfect substitutes.

The capital stock in each sector changes according to the rate of fixed capital formation and the rate of geometric depreciation. It is assumed that the investment process is subject to rising marginal costs of installation, with total real investment expenditures in sector h equal to the value of direct purchases of investment plus the per unit costs of installation. These per unit costs, in turn, are assumed to be a linear function of the rate of investment. One advantage of using an adjustment cost approach is that the adjustment cost parameter can be varied for different sectors to capture the degree to which capital is sector specific.

Box 8.2 Overview of the G-Cubed model Regions:

• United States

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