Simulating long run structural change with a dynamic general equilibrium model

Motivated by the emerging demand for the construction of internally consistent and sufficiently detailed scenarios of long-run economic development, in this paper we present a computable general equilibrium model (G-RDEM), specifically designed for the generation of long run scenarios of economic development, featuring a non-homothetic demand system, endogenous saving rates, differentiated industrial productivity growth, interest payments on foreign debt and time-varying input-output coefficients. We illustrate how parameters of the five modules of structural change have been estimated, and we test the model by comparing its results with those obtained by a more conventional recursive dynamic computable general equilibrium model, not designed to capture structural adjustment processes. It is indeed found that the two model formulations do produce different findings, both globally and at the regional and industrial level. Our numerical tests suggest that one very important factor is the decline in the aggregate saving rates (due to higher dependency ratios in the demographic structure), which influences capital stock accumulation, investments, composition of the final demand and productivity. In terms of employment of primary resources, we detected a general pattern of decline in the primary sector, compensated by an increase in several service industries.