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Mending the Family Tree: A Reconciliation of the Linearization and Levels Schools of CGE Modelling

  • Thomas W. Hertel
  • J. Mark Horridge
  • K. R. Pearson

This paper offers a critical comparison between the North American levels school of applied general equilibrium modelling and the Norwegian/Australian school of linearizers. The paper develops both the levels and linearized representations of a neoclassical, multiregion trade model. This development is used to focus attention on similarities and differences between the two schools. The main conclusions are as follows. i) The method used to solve applied general equilibrium models is not really the issue - the solution method used has become short-hand for a host of cultural differences reflecting the orientation of the two groups. ii) Levels or linearized versions of models are equally valid representations. Either representation is a natural starting point for obtaining accurate solutions of the model. iii) Linearized versions ofter aid transparency in explaining the mechanisms at work in a model. iv) In view of recent developments with the GEMPACK software suite, it is no longer necessary for linearizers to settle for solutions containing linearization errors. v) The two schools have a great deal in common and both would benefit from greater cooperation.

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File URL: http://www.copsmodels.com/ftp/workpapr/ip-54.pdf
File Function: Initial version, 1991-06
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File URL: http://www.copsmodels.com/elecpapr/ip-54.htm
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Paper provided by Victoria University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number ip-54.

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Date of creation: Jun 1991
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Publication status: Published in Economic Modelling, Elsevier, vol. 9(4), pages 385-407, October 1992.
Handle: RePEc:cop:wpaper:ip-54
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Web page: http://www.copsmodels.com/about.htm
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  1. Harrison, Glenn W. & Jones, Richard & Kimbell, Larry J. & Wigle, Randal, 1993. "How robust is applied general equilibrium analysis?," Journal of Policy Modeling, Elsevier, vol. 15(1), pages 99-115, February.
  2. repec:cup:cbooks:9780521319867 is not listed on IDEAS
  3. Hanoch, Giora, 1975. "Production and Demand Models with Direct or Indirect Implicit Additivity," Econometrica, Econometric Society, vol. 43(3), pages 395-419, May.
  4. Wigle, Randall M, 1991. "The Pagan-Shannon Approximation: Unconditional Systematic Sensitivity in Minutes," Empirical Economics, Springer, vol. 16(1), pages 35-49.
  5. K.R. Pearson, 1991. "Solving Nonlinear Economic Models Accurately Via a Linear Representation," Centre of Policy Studies/IMPACT Centre Working Papers ip-55, Victoria University, Centre of Policy Studies/IMPACT Centre.
  6. Dawkins, Christina & Srinivasan, T.N. & Whalley, John, 2001. "Calibration," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 58, pages 3653-3703 Elsevier.
  7. Brown, Drusilla K., 1987. "Tariffs, the terms of trade, and national product differentiation," Journal of Policy Modeling, Elsevier, vol. 9(3), pages 503-526.
  8. K.R. Pearson, 1986. "Automating the Computation of Solutions of Large Economic Models," Centre of Policy Studies/IMPACT Centre Working Papers ip-27, Victoria University, Centre of Policy Studies/IMPACT Centre.
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