Capital markets and computable general equilibrium models: Comparative statics without apology?

Abstract

Observing that many computable general equilibrium (CGE) models differ in their assumption about capital mobility, this paper examines the implications for policy simulations of the same CGE model under alternative assumptions about the capital market. Specifically, we take a typical CGE model of a developing country (Cameroon) and compare outcomes assuming no capital mobility with those when capital is perfectly mobile across sectors. Two generic experiments—an increase in foreign savings (“the Dutch disease”) and elimination of import tariffs—yield similar conclusions: The outcomes of policy simulations are broadly similar in the short-run (no capital mobility) and the long-run (perfect mobility). When they differ, the price changes are damped and quantity changes accented in the long run compared with the short run. This can be explained by the fact that supply curves are more elastic in the long-run. In some cases, this pattern is broken, due to the particular nature of the sector. We conclude that, while decisions on modeling the capital market should be based on the nature of the market and the relevant time-horizon, this decision is not crucial, as long as care is taken in interpreting the results.