Economic Projection with Non-homothetic Preferences: The Performance and Application of a CDE Demand System
Name
MITJPSPGC_Rpt307.pdf
Size
3.34 MB
Format
Adobe PDF
Checksum (MD5)
b53b7f53f018886ff815d493a9410b6f
Author(s)
Chen, Y.-H.H.
Date Issued
December 2016
Publisher
MIT Joint Program on the Science and Policy of Global Change
Citation
307
Series/Report no.
MIT Joint Program Report Series;307
Abstract
In computable general equilibrium modeling, whether the simulation results are consistent to a set of valid own-price and income demand elasticities that are observed empirically remains a key challenge in many modeling exercises. To address this issue, the Constant Difference of Elasticities (CDE) demand system has been adopted by some models since the 1990s. However, perhaps due to complexities of the system, the applications of CDE systems in other models are less common. Furthermore, how well the system can represent the given elasticities is rarely discussed or examined in existing literature. The study aims at bridging these gaps by revisiting calibration details of the system, exploring conditions where the calibrated elasticities of the system can better match a set of valid target elasticities, and presenting strategies to incorporate the system into GTAP8inGAMS—a global computable general equilibrium model written in GAMS and MPSGE modeling languages. It finds that the calibrated elasticities can be matched to the target ones more precisely if the corresponding sectorial expenditure shares are lower, target own-price demand elasticities are lower, and target income demand elasticities are higher. It also verifies that for the GTAP8inGAMS with a CDE system, the model responses can successfully replicate the calibrated elasticities under various price and income shocks.
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