COMPUTABLE GENERAL EQUILIBRIUM MODELING Numerical Simulations in a 2-Country Monetary General Equilibrium Model

This paper presents the concept of numerical CGE modeling with the help of a 2-country general equilibrium model. In the framework of this simple dynamic monetary model the effects of a (unilateral) monetary and fiscal expansion are simulated. The exchange rate of the home vis-à-vis the foreign currency depreciates in response to both types of shocks. The monetary expansion leads to an increase in home relative to foreign private consumption and to a sharp increase in relative home output in the short run, while in the long run output increases in the foreign country and decreases in the home country. The unilateral fiscal expansion, on the other hand, results in a fall of private consumption in the home relative to the foreign country, and in an increase in relative home output in the short as well as in the long run. The world real interest rate falls quite substantially in response to both shocks.