Understanding the economy-wide impacts of CAP decoupling: An assessment of alternative CGE model specifications

The paper analyses the consequences of decoupling farm support for Scottish agriculture and the wider Scottish economy. The analysis is carried out using three types of dynamic computable general equilibrium models: A recursive dynamic model and two forward-looking CGE models, one assuming physical capital is sector-specific, the other assuming such capital is mobile between sectors. The essential difference between the recursive dynamic and forward-looking models is the way in which farm households are assumed to responds to shocks. In particular, in the recursive dynamic case households only respond to past behaviour while with the forward-looking model the households equate returns across the various assets they own. Decoupling is simulated by introducing a production subsidy to land. The results illustrate that the difference between the backward-looking and the two forward-looking models lies in the response of households in the first number of years after the shock and that this can lead to different outcomes in the long-run between the three model types. Systematic sensitivity analysis suggests that the results of the backward-looking model are more uncertain, especially in later years, compared to the two forward-looking models. Future research should be aimed at improving the calibration of the models.