A Computable General Equilibrium Model of Nepal

Abstract

Multisector Computable General Equilibrium (CGE) models provide an attractive alternative to econometrically based macro model. First they allow the establishment of a very direct and transparent link between the economic structure as embodied in a Social Accounting Matrix (SAM) and the results provided by the CGE model simulation. Second, CGE models have in general a more limited data requirement than econometric models; CGE models do not require long lime series and are calibrated around a base year SAM with a small amount of additional data used to estimate parameters and elasticity of substitutions/transformation. Third, CGE models are by construction better suited than econometric models in analyzing the impact of structural reforms implying changes in relative prices. The scope of this paper is to illustrate the steps taken in deriving a CGE model after constructing a SAM for Nepal. The model is then used to analyze the macroeconomic impact of the ongoing trade liberalization. The organization of the paper is as follows. First, after referring to the abundant literature on CGE models, the development of the SAM for fiscal year 1990/1991 for Nepal that forms the heart of the CGE model used in the paper is reviewed. Second, the structure of the CGE model for Nepal is discussed. Third, the model to examine the macroeconomic impact of reductions in tariffs and other nontariff trade barriers is used. Finally, conclusions are drawn from the analysis and avenues for additional research are suggested.