G-Cubed Model

Overview

The G-Cubed model was originally developed by McKibbin and Wilcoxen (1992). It combines the dynamic macroeconomic modelling approach taken in the MSG2 model of McKibbin and Sachs (1991) with the disaggregated, econometrically estimated, intertemporal general equilibrium model of the U.S. economy by Jorgenson and Wilcoxen (1989). The Jorgenson-Wilcoxen model breaks the economy down into 35 separate industries, each of which is represented by an econometrically estimated cost function. The G-Cubed model has many sectors but each sector is based on econometrically estimated cost functions.

The G-Cubed model has been constructed to contribute to the current policy debate on environmental policy and international trade with a focus on global warming policies, but it has many features that will make it useful for answering a range of issues in environmental regulation, microeconomic and macroeconomic policy questions. It is a world model with substantial regional disaggregation and sectoral detail. In addition, countries and regions are linked both temporally and intertemporally through trade and financial markets. Like MSG2, G-Cubed contains a strong foundation for analysis of both short run macroeconomic policy analysis as well as long run growth consideration of alternative macroeconomic policies. Intertemporal budget constraints on households, governments and nations (the latter through accumulations of foreign debt) are imposed. To accommodate these constraints, forward looking behavior is incorporated in consumption and investment decisions. Unlike MSG2, G-Cubed also contains substantial sectoral detail. This permits analysis of environmental policies which tend to have their largest effects on small segments of the economy. By integrating sectoral detail with the macroeconomic features of MSG2, G-Cubed can be used to consider the long run costs of alternative environmental regulations yet at the same time consider the macroeconomic implications of these policies over time. The response of monetary and fiscal authorities in different countries can have important effects in the short to medium run which, given the long lags in physical capital and other asset accumulation, can be a substantial period of time. Overall, the model is designed to provide a bridge between computable general equilibrium models and macroeconomic models by integrating the more desirable features of both approaches. Details on this integration and how G-cubed bridges the gap between CGE and traditional macro-econometric models can be found in McKibbin (1993b).

G-Cubed is still in the process of development but it is already a large model. In its current form it contains over 5,000 equations and 110 intertemporal costate variables. Nonetheless, it can be solved using software developed for a personal computer.

The Structure of the Model

The G-Cubed model consists of many economic regions and many sectors depending on the version. This disaggregation enables us to capture the sectoral differences in the impact of alternative shcoks and economic policies. 


Full details of the model can be found at

WWW.MSGPL.COM.AU

In particular the reader should refer to the paper by

McKibbin W and Wilcoxen P (2013), A Global Approach to Energy and the Environment: The G-cubed Model” Handbook of CGE Modeling, Chapter 17, North Holland, pp 995-1068