MaCGE-MOD – The First Computable General Equilibrium Model for Malta
Most models developed and used within Central Banks are macro in nature and are therefore very capable in analysing the aggregate economic effects of exogenous shocks to policy decisions within the business cycle frequency. However, most of these models are not designed to trace the effects of shocks at a disaggregated sectoral level nor are they able to capture the sectoral interlinkages that could very much shape the macroeconomic dynamics in response to aggregate shocks.
In this light, the Central Bank of Malta, in collaboration with the University of Macerata has developed the first Computable General Equilibrium Model for Malta, named MaCGE-MOD. This model complements other recent modelling efforts at the Bank aimed at facilitating sectoral analyses of shocks or policies, such as the sectoral extension of STREAM.
MaCGE-MOD is a multi-input, multi-output and multi-sectoral CGE model calibrated on the 2015 Social Accounting Matrix (SAM) for Malta. The latter records the value of all transactions involving commodities, production activities and institutional sectors of the economy. The Maltese SAM which underpins MaCGE-MOD is highly disaggregated, encompassing all the transactions involving 44 different production activities in the Maltese economy. Each of these activities makes use of intermediate goods, labour, and capital to produce domestic output, which in turn can be disaggregated into 44 different commodities. The SAM also records the primary and secondary income flows among the different institutional sectors in the Maltese economy, thereby providing a complete representation of the circular flow of income.
The model is rooted in Walrasian general equilibrium principles, although it also relaxes some of the traditional Walrasian features by allowing for the formation of involuntary unemployment, the presence of rigidities in consumption decisions for the Government, and thus in its closing balance, and a closing net balance with the Rest of the World. By solving the system of equations with a particular shock or policy in place, the model generates a new set of disaggregated macroeconomic variables, with differences relative to the baseline ones recorded in the SAM allowing the quantification of the economic impact of the shock. The model is static, and the economic impact of the shock simulated by MaCGE-MOD reflects the total effect in the medium-run once all direct, indirect, and induced effects have propagated through the economy.
MaCGE-MOD will be a useful tool to understand the sectoral effects generated by aggregate shocks while taking in consideration the complex interactions that arise from the sectoral links that exist in the production process of the economy. Moreover, the granularity of the SAM underpinning the model also enables users to trace the effects of a shock to movements in the circular flow of income in the economy thus tracing the effects of policy changes on the different economic agents. Through the granularity present in the SAM and consequently in MaCGE-MOD, the model can also accommodate sector-specific shocks, making it a very useful and flexible addition to the current suite of models used at the Bank.