You can't have a CGE recession without excess capacity |
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| Authors: | Peter B Dixon Maureen T Rimmer |
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| Institution: | 1. College of Economics & Management / College of Land Management, Huazhong Agricultural University, Wuhan 430070, China;2. School of Economics, Lanzhou University, Lanzhou 730000, China;3. Charles H. Dyson School of Applied Economics and Management, Cornell University, Ithaca 14850, USA;4. Economics and Management School, Wuhan University, Wuhan 430072, China;1. School of Mechanical Engineering, Tianjin University of Technology, Tianjin 300191, China;2. Department of Electrical and Materials Science, Faculty of Engineering Sciences, Kyushu University, Kasuga, Fukuoka 816-8580, Japan;1. Applied Mechanics and Bioengineering, Aragón Institute of Engineering Research (I3A), University of Zaragoza, Spain;2. CIBER de Bioingeniería, Biomateriales y Nanomedicina (CIBER-BBN), Spain |
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| Abstract: | Simulations with dynamic, single country, CGE models typically imply that reductions in domestic demand, e.g. a cut in investment, generate increases in exports and reductions in imports facilitated by real depreciation. However, currently in the U.S. a large reduction in investment is occurring simultaneously with a contraction in exports and little movement in the real exchange rate. We show that to describe this situation it is necessary to drop the standard CGE assumption that capital is always fully employed in every industry. After introducing an excess capacity specification, we simulate the U.S. recession with and without the Obama stimulus package. |
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