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GTAP Resource #3292

"What Can a CGE Say about the Housing Bubble Burst Crisis and Global Imbalances?"
by Lemelin, André, Veronique Robichaud and Bernard Decaluwe


Abstract
In this paper, we use a worldwide recursive dynamic CGE model with international financial assets to simulate implications of the 2007-2008 speculative bubble burst, economic recovery plans and government debts.
Our model makes explicit the international capital flows which balance the current account and computes their cumulative consequences on the international investment positions of countries. Each country is as a single agent, owning a portfolio of assets which constitutes its net wealth. Wealth consists of financial wealth and physical assets (ownership titles to productive capital or claims on the flow of income generated by capital). Financial wealth is made up of assets and liabilities (debt). The asset-liability structure of the financial portfolio is endogenous, and it is possible for a country-agent to have negative net financial assets. Borrowing is limited, however, by the willingness of other country-agents to lend, following their own portfolio choices, and by the competition from other borrowing countries. This makes current account balances endogenous.
To simulate consequences of the 2007-2008 crisis, we represent the burst of the real-estate bubble in the United States as a sudden fall in the (perceived) wealth of households, which forces them to save more. Indeed, savings rates have in fact increased in the United States in 2009. In the default model closure, investments are savings-driven, so that increased savings normally result in increased investment, which would compensate for the drop in consumption expenditures. But since the increase in savings is a consequence of a burst bubble, a fall in entrepreneurial confidence will dampen investment. So investment expenditures are exogenously capped.
Using our worldwide CGE model, we compare the bubble-burst crisis scenario with, and without recovery plans, to a BAU scenario. Emphasis will be on the differential evolution of trade and international investment positions.


Resource Details (Export Citation) GTAP Keywords
Category: 2010 Conference Paper
Status: Published
By/In: Presented at the 13th Annual Conference on Global Economic Analysis, Penang, Malaysia
Date: 2010
Version: 1
Created: Lemelin, A. (4/14/2010)
Updated: Lemelin, A. (5/11/2010)
Visits: 1,793
- Economic growth
- Dynamic modeling


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Public Access
  File format GTAP Resource 3292: revised version of Penang paper  (387.1 KB)   Replicated: 0 time(s)


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Special Instructions
Revised version of Penang GTAP paper by Lemelin, Robichaud and Decaluwé.


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