Introducing more flexible modelling of regional household consumption and saving behaviour into the dynamic GTAP model

Abstract

A dynamic version of the GTAP model of the global economy became available in 2012. The dynamic version known as GDyn, introduced partial adjustment mechanisms for capital accumulation and a dynamic accounting of capital-finance and related income flows between regional households and firms, and a global trust. This paper builds on this original work by including a revised modelling of investment and capital-finance flows to reach a long-run equilibrium in which model rates of return are equal and stable over time. This paper then further adds to the capabilities of the GDyn model by: (i) relaxing the assumption of fixed shares in the consumption-saving decisions of national households; and (ii) providing for the inclusion of exogenously determined changes in national consumption-saving choices. The revised model — termed GDyn-FS — is used to: infuse forecast reductions in saving as a proportion of domestic income for China in a model base line; and, against this base line, simulate a decline in the willingness to invest in a medium-sized open economy.