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Developing a DSGE Consumption Function for a CGE Model

Peter Dixon and Maureen Rimmer

Centre of Policy Studies/IMPACT Centre Working Papers from Victoria University, Centre of Policy Studies/IMPACT Centre

Abstract: DSGE models incorporate attractive theoretical specifications of the behaviour of forward-looking households facing an uncertain future. Central to these specifications is the idea that households decide their consumption level in year t by applying a function (policy rule) whose arguments represent information available in year t. Using the insight that, under certain conditions, the policy rule (but not the resulting policy) is invariant through time, DSGE modellers have developed the perturbation and other methods for quantitatively specifying policy rules. They have applied these methods in small macro models. In this paper we adapt the perturbation method so that it can be used to specify a policy rule for household consumption in a full-scale CGE model. A novel feature of our method is the use of specially constructed CGE simulations to reveal key parameters used in deriving the policy rule. We apply our method in an illustrative simulation of the effects of a technology shock in a 70-sector version of the USAGE model of the U.S. economy.

Keywords: Consumption; function; Dynamic; stochastic; general; equilibrium; Computable; general; equilibrium; Perturbation; method (search for similar items in EconPapers)
JEL-codes: E21 C61 C68 C63 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-mac and nep-ore
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