Alternative Macroeconomic Closures in Baseline Projections – Implications for Macro Outcomes and Sectoral Structure

Wen Jin Yuan and Mary Burfisher

No 333282, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: This paper compares baseline projections for Italy over 2015-2044 in the recursive dynamic GTAP-RD model framework under three alternative macroeconomic closures: the trade balance adjusts as global investment flows to regions with the highest expected rates of return to capital, the trade balance adjusts as regions receive a fixed share of the global supply of savings, and the regional savings rate adjusts to maintain a fixed balance of trade as global investment flows shift. The macro behaviors that bring regional savings and investment into equilibrium in each closure are fundamentally different, and result in pronounced differences in macroeconomic baseline projection paths — either a rising capital account deficit, a falling capital account deficit, or a stable capital account balance with a change in the savings rate and a shift in the composition of aggregate demand. These outcomes have implications for sectoral structure, as a capital account deficit/trade surplus favors production of tradables, a capital account surplus/trade deficit favors the production of nontradables, and a fixed balance of trade favors more balanced sectoral growth. One of the main triggers for the differences in baseline outcomes across closures is that Italy is a slow-growing economy relative to the rest of the world.

Keywords: International; Relations/Trade (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:333282

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