Modelling the G20

Abstract

World leaders have declared the G20 to be the premier forum for economic cooperation. But as its influence and policy agenda has grown, so too has the need to be able to effectively model the G20 and the implications of its policy agenda. The paper introduces the G-Cubed (G20) model: a multi-country, multi-sector, intertemporal general equilibrium model of the G20. The paper gives an overview of the model and highlights its key features through four simulated shocks, all of which relate to the G20’s goal of reducing global current account imbalances: a fiscal shock (reducing the fiscal deficit in the United States), a productivity/fiscal shock (increasing infrastructure investment in Germany), a consumption shock (increasing domestic consumption in China) and the collective impact of all three shocks occurring simultaneously. The results demonstrate that, to be effective, any model of the G20 must reflect the complex trade and financial linkages between countries, the structural differences across G20 economies and the short-term rigidities observed empirically in the data, as well as a high level of disaggregation across economies, markets and sectors. The simulations show that reducing current account imbalances through these policies often comes with a real economic cost. The results also explain some of the shifts in global current account balances observed since 2007.

Keywords: macroeconomic policy coordination, intertemporal general equilibrium models, econometric modelling, Group of 20, fiscal policy, structural reform

JEL Classification: F4, C68, C5, C02, E17, D9, D58, E62