Closing the factory doors until better times: CGE modelling of drought using a theory of excess capacity

Glyn Wittwer and Marnie Griffith

No 331997, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: The aim of this paper is to analyse the regional economic impacts of a prolonged period of recurrent droughts. The model used for analysis is TERM-H2O, a dynamic successor to the bottom-up, comparative static TERM (The Enormous Regional Model). We concentrate on the regions of the southern Murray-Darling basin (SMDB). Large change simulations are a challenge for modellers. Drought brings substantial inward supply shifts for farm sectors. This paper outlines various theoretical modifications undertaken to improve the modelling of drought in a computable general equilibrium (CGE) framework and then applies them to the period from 2005–06 on. In particular, we apply a theory of sticky capital adjustment to downstream processing sectors, whereby processors retire capital temporarily in response to scarcer farm products. This limits upward price movements in farm outputs and results in more realistic modelling of drought. Results are explained using a back-of-the-envelope approach. In addition, the approach provides some estimate as to the impact of prolonged drought on structural change in predominantly rural regions of south-eastern Australia.

Keywords: Research Methods/ Statistical Methods; Environmental Economics and Policy (search for similar items in EconPapers)
Pages: 25
Date: 2010
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Working Paper: Closing the factory doors until better times: CGE modelling of drought using a theory of excess capacity (2010)
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