The Econometric Critique of Computable General Equilibrium Modeling: the Role of Functional Forms.

Computable general equilibrium (CGE) models are among the most influential tools in applied economics. However, some serious questions have been raised about the empirical validity of these models. The core of the critique is that the parameter selection criteria are unsound and the use of first-order (CES class) functional forms imposes influential restrictions on the model's structure. A formal summary of the case against standard CGE modeling is presented, as is an alterntive econometric-based modeling strategy which answers critique. We then present a comparative CGE modeling experiment designed to assess the role of function forms. It is found that choice of functional forms affects not only industry-specific results, but aggregate results as well, even for small policy shocks.