Debunking the Myths of Computable General Equilibrium Models

Abstract

Computable General Equilibrium (CGE) models are probably the most utilized tool globally for development planning and macro policy analysis. Despite this their history is not available in the literature, their theoretical grounding is never explained, and the mechanics of the models remain hidden under layers of rhetoric, myths and hand gestures at various theoretical structures. Therefore, this paper explains what CGE models are, how they work, and where they came from. It will be shown that CGE models have always been and are macroeconomic models, and not based on general equilibrium theory. In doing so, it will detail how Walras’s general equilibrium is not equivalent to Arrow-Debreu’s General Equilibrium, and that CGE models use neither of those frameworks. Furthermore, this paper gives the history of the model and identifies its (relatively) few key variables, in order to explain how model builders construct CGE models, and consciously impose causality, while choosing exogenous variables that define results. CGE models can be a very useful policy tool, but only by understanding that it is a static fixed output model, not built for dynamic analysis along the lines of Arrow-Debreu general equilibrium. With this paper in hand, users will be able to know which questions to ask model builders, to ensure more transparency and clarity in future CGE models. *City University, London The New School for Social Research, New York www.mitrakahn.com Benjamin@mitrakahn.com