Regional Computable General Equilibrium Modeling

Over the past three decades the field of regional computable general equilibrium (CGE) modeling has flourished, growing from a handful of top-down, single-region and low-dimensioned multiregional models, to a mature field, in which output of large-scale general-purpose multiregional CGE models has become a standard input to policy deliberations in a growing number of countries. Researchers have ensured that innovations in theory, data construction and model application have matched growth in both computing power and the appetite of government decision makers for expanding levels of policy-relevant regional and sectoral detail. This chapter focuses on the development of the field, its current state, and its accomplishments in elucidating important research questions and policy issues in regional economics. We begin by discussing the development of regional CGE modeling as a subdiscipline of CGE modeling, expanding on the distinguishing attributes of regional CGE models. We then discuss policy applications of regional CGE models, demonstrating the power of such models to answer important policy questions and providing an application-driven motivation for our discussion of the innovations in the field. We consider the key theoretical features of multiregional CGE models, identifying the many ways researchers have modeled the behavior of economic agents in a multiregional context. The paucity of data at the regional level suitable for CGE modeling has long been a constraint and so we discuss methods for populating a multiregional model’s database. We then undertake simulations with a large-scale CGE model and show how output of the model can be communicated in a way that does not presume knowledge of the details of the underlying model. We note that effective communication of the results of regional CGE modeling studies, based on a correct interpretation of the model mechanisms which underlie them, is a prerequisite for its acceptance in policy circles.