Solving a Large-Scale Intertemporal Applied General Equilibrium Model

Intertemporal Computable General Equilibrium (CGE) models have the potential to quantify the implications of sectoral and temporal linkages which are often crucial for understanding the effects of economic shocks. However, such models will prove to be of practical use for policy analysis only if accurate solutions can be obtained at reasonable cost. Often, the usefulness of intertemporal CGE models for policy analysis is diminished because the degree of economic detail incorporated is compromised in order to maintain computational tractability. The purpose of this paper is to describe how Euler's method may be used to solve large-scale intertemporal CGE models without compromising significantly on the type and degree of economic detail modelled. In particular, there is no need to restrict the number of costate variables (e.g., by assuming that capital stocks are homogeneous) nor to assume that the solution will always be interior.