Econometric analysis and general equilibrium research are two major strands of modern economics, but they are rarely used together. Econometricians work on models of part of the economy with cross section and time series observations in mind, while general equilibrium analysts often calibrate their models with data from a single point of time, rather than estimating them fully. The main objective of this project is to continue research work on building and using general equilibrium models which are based firmly on econometric analysis, thus bridging these two areas of activity. It will has the two broad scientific objectives of refining research methods by finding complementarity between these two approaches, and of using them to analyse particular problems in a pilot modelling scheme.

We aim to construct general equilibrium models for a single country and for multiple countries, with the aim of analysing the micro and macro impacts of tax and trade policies in a particular economy, and the broader regional level of the interdependent global economy. In order to be more realistic from the policy perspective, the models will use a dynamic, multisectoral and multi-household framework.

The single economy model will be constructed from an updated data set of the UK economy and will aim to study the dynamic efficiency effects of major UK taxes. It will seek to further collaboration with the Inland Revenue. This is a pilot, in that it will develop general solution methods, which can be applied to other economies. (This would require further funding from external agencies to cover the costs of data collection and model implementation.)

The global trade model will reflect the trade and capital flow structure of the global economy consisting of North America, Europe, Japan, newly emerging countries and developing economies. It may be possible to raise some research interest from agencies such as the Department of Trade and Industry, World Trade Organisation, or international and regional development banks. For example, a more detailed model could study the impact of EU enlargement to the east, which should be of interest to the European Commission, or the European Bank for Reconstruction and Development.

The specification of the models is critical to producing worth-while results, and so the first phase of the project will involve model design, in conjunction with a review of the most recent literature. The chosen specification is likely to require further data collection (including input-output tables, trade and capital flows, and the distribution of consumption and income pattern across households, provided in the Family Expenditure Survey). Collecting and processing this data to make it suitable for estimating the model will be the main task of the research assistant for which funding is requested. Once the model has been estimated, calibrated, and tested, it can be applied for policy analysis.

The major policy questions we can investigate using a single economy model include potential impacts of trade or tax policy on the time path of economic growth, investment, capital formation, the economy wide burden of taxes, and marginal cost of public funds. The global trade model can answer questions such as the size of distortions and gains of bilateral and multilateral arrangements on the global economy, or the division of benefits of gains to small and bigger economies from unilateral, bilateral or multilateral liberalisation.

The completion of this analysis will provide answers to important policy questions, and will also have a demonstration effect, showing potential funding bodies that these techniques can be successfully applied, and deserve further support.