Forward looking dynamics in spatial CGE modelling

This paper sets up a spatial dynamic CGE framework by combining the optimal growth model of saving and investment under adjustment costs and the spatial CGE model with Dixit–Stiglitz structure in the modern sector. Because of increasing product diversity on the dynamic equilibrium path, the model belongs to the category of semi-endogenous growth models. We overcome the difficulty of existing multiregional models to correctly approximate the infinite horizon equilibrium by employing a theoretically consistent terminal condition. The distinction of goods, factors, firms, and households by location, and the incorporation of trade costs in the model allow to study a variety of issues in regional and transport economics. We describe the model calibration and a tailor-made solution algorithm. The functionality is demonstrated using two illustrative examples.