MIRAGE-D with international financial assets (new CEPII working paper by André Lemelin)

CEPII Working Paper available at : http://www.cepii.fr/francgraph/doctravail/pdf/2009/dt2009-27.pdf

An English language document is available at http://ssrn.com/abstract=1186062

In the MIRAGE trade policy simulation model, country current account balances are kept constant relative to world GDP, at their base year values, for all of the simulation period. Such a specification imposes no limit to country international investment positions, which do not appear explicitly in the model anyway. That rather unrealistic hypothesis could have an influence on trade flows, and consequently on trade policy simulation results. The work presented here seeks to stimulate discussion on how the model could be modified in that respect, by proposing an explicit modelization of the financial domain and country international investment positions.

Each country or group of countries in the model is represented by a single economic agent. This agent distributes its wealth among assets following a three-stage portfolio allocation model (Decaluwé et Souissi, 1994 ; Souissi, 1994 ; Souissi et Decaluwé, 1997).

This work has also been an opportunity to explore a mechanism for allocating investment among industries and countries along the lines of Tobin’s « q » theory of investment, which is different from the gravity model of the basic version of MIRAGE. Demand is confronted to the supply of investment financing, which is none other than the demand for physical assets (capital ownership titles) from the portfolio allocation model described above. The allocation of investment among industries and countries is determined by the supply-demand equilibrium.

These ideas were incorporated into a modified version of MIRAGE called MIRAGE-D (D for « Debt »). In the paper, results obtained with MIRAGE and MIRAGE-D are compared. In addition, sensitivity tests are conducted by running MIRAGE-D with different sets of elasticity values in the portfolio allocation model.