Achieving a long-run equilibrium in the dynamic GTAP model

A dynamic version of the GTAP model of the global economy became available in 2012. The dynamic version known as GDyn, introduced partial adjustment mechanisms for capital accumulation and a dynamic accounting of capital-finance and related income flows between regional households and firms, and a global trust. In long-run equilibrium, the model rates of return are to be equal and constant over time. In practice, illustrative results presented with the release of GDyn show the equilibrium conditions are not satisfied. This paper confirms this model property. It finds that this gives rise to model instability which limits the use of GDyn for the analysis of economic growth within a neoclassical framework. To achieve model stability and overcome this limitation, modelling of rates of return and capital-finance flows is further developed within the GDyn framework to satisfy the stated longer-run neoclassical equilibrium conditions. Results of the revised model demonstrating a stable, long-run equilibrium are reported together with an illustrative policy simulation of a productivity improving technological change in a medium-sized open economy. Some key areas for further research are identified.