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Economic Projection with Non-homothetic Preferences: The Performance and Application of a CDE Demand System

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  • Chen, Y.-H. Henry

Abstract

Computable general equilibrium modeling has been used for decades in studying implications of various counterfactual scenarios. Nevertheless, whether the model responses are consistent to empirically observed income and own-price demand elasticities remains a key challenge in many modeling exercises. To address this issue, the Constant Difference of Elasticities (CDE) demand system has been adopted by the GTAP model since the 1990s. However, perhaps due to complexities of the system, the applications of CDE system in other general equilibrium 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 with better calibration performance, and presenting strategies to incorporate the system into GTAP8inGAMS, a global computable general equilibrium model written in GAMS and MPSGE modeling languages. The study finds that the calibrated elasticities of the CDE system can be matched to the targeted elasticities more accurately if the sectorial resolution is higher, targeted own-price demand elasticities are lower, and targeted 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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  • Chen, Y.-H. Henry, 2015. "Economic Projection with Non-homothetic Preferences: The Performance and Application of a CDE Demand System," Conference papers 332611, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332611
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    References listed on IDEAS

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