Global Comparatives Statics in General Equilibrium: Model Building from Theoretical Foundations

19 Pages Posted: 20 May 2020

See all articles by James R. Markusen

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: May 2020

Abstract

International trade economists made seminal contributions to general equilibrium theory, moving away from an emphasis on existence of equilibrium to algebraic formulations which enabled us to characterize key relationships between parameters and variables, such as that between tariffs and domestic factor prices and welfare. But the analysis remained limited in value for policy evaluation: the analysis was local, it provided only qualitative results, it was limited to very small models, and strictly interior solutions had to be assumed. The contribution of this paper is pedagogic and methodological, providing a primer for those wishing to do or teach general-equilibrium counterfactuals on (for example) structural models. I show how the tools from early local comparative statics analyses can be generalized via the use of Shepard's lemma, duality, complementarity and the Karush-Kuhn-Tucker theorem into a global, quantitative analysis of large changes in high-dimension models which also allows for regime changes and corner solutions. I then show how the resulting non-linear complementarity problem directly translates into a numerical model using GAMS (general algebraic modeling system).

JEL Classification: D50, D58, F50

Suggested Citation

Markusen, James R., Global Comparatives Statics in General Equilibrium: Model Building from Theoretical Foundations (May 2020). CEPR Discussion Paper No. DP14764. Available at SSRN: https://ssrn.com/abstract=3603996

James R. Markusen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER) ( email )

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