Investment Behaviour in Transition Countries and Computable General Equilibrium Models

When applying Computable General Equilibrium (CGE) models to transition economies, it is not plausible to use the standard assumption that the base year data represents stable structural characteristics or even the steady state of the economy. The suggestions forwarded until now to overcome this problem are discussed in this article. An amendment is proposed by modifying the investment modelling within the dynamic CGE setting. The standard formulation of installation costs for capital is extended through the inclusion of adjustment costs that depend on the change of the investment level. Such formulation of the adjustment costs within the dynamic CGE model leads to an investment behaviour that mirrors the empirical data of the first years of the transition