Applied General Equilibrium Analysis

Abstract

Walrasian general-equilibrium theory provided the central framework of 20 th century economics, "the ultimate model of the market" (John Shoven and John Whalley 2015, 2). Joseph Schumpeter considered it the "Magna Carta" of economics, providing both a constitutional document and a map for the field (1954, 242 and 827). In the 1950s and 1960s, Harry Johnson (1951-52, 1956), Arnold Harberger (1962), and others used general-equilibrium methods to study a variety of applied policy issues, such as the welfare effects of tariffs and the incidence of the corporate income tax. The models used by these researchers were small enough that they could be solved analytically. By the 1970s, economists were developing general-equilibrium models of sufficient size and complexity that it was necessary to use computers to find numerical solutions. In this paper, we will discuss both analytical and computational models, but our main focus is on the computational models. The computational models have come to be known as applied general-equilibrium (AGE) or computational GE or computable GE (CGE) models. We will refer to the computational models as AGE models, even though the analytical models also fall under the rubric of applied work. AGE models involve mathematical specifications of the behaviors of agents, who interact through supply and demand for different goods in a Walrasian general-equilibrium system. Government policies are typically modeled as constraints to be manipulated. The models produce computer simulations of the effects of policy changes on economic variables, such as prices, quantities, growth rates, employment, income, and economic efficiency. AGE models are most widely employed in international trade, public finance, economic development, and

“Rise and Fall” of the Walrasian Program in Economics: A Social and Intellectual Dynamics of the General Equilibrium Theory

“…The Walrasian GET program became prominent in economics in the 1950s, was recognized and institutionalized in the international context in the 1960s, and had the highest academic consecration (most notably with the Nobel Memorial Prize) in the 1970s and the early 1980s-which, interestingly, coincides with the upsurge of the work in applied GE modeling (Ballard and Johnson 2017). The program, however, became most prolific during the period from the mid-1970s to the late 1990s, and it has stayed a vibrant research program up to this day.…”

“…On the CGEs, see the illuminating analysis inBallard and Johnson (2017). The literature on the DSGE approach is too voluminous to be adequately treated here.…”