Monetary instruments - GEM-E3

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Model Documentation - GEM-E3

Corresponding documentation
Previous versions
Model information
Model link
Institution Institute of Communication And Computer Systems (ICCS), Greece,
Solution concept General equilibrium (closed economy)
Solution method Optimization

The model allows for a free variation of the balance of payments, while the real interest rate is kept fixed. An alternative approach, implemented in the GEM-E3 model as an option, is to set the current account of a country or of the total EU with the rest of the world (RoW) to a pre-specified value, in fact a time-series set of values, expressed as percentage of GDP. This value is obtained either as a result from the baseline scenario or is given by the modeller as a share of GDP through the parameter $share\_ca_{er,t}$. As a shadow price of this constraint, a shift of the real interest rate at the level of the EU is endogenously computed. This shift is proportionally applied to the real interest rates of each member-state.

This mechanism enables a robust comparison between scenarios since the modeler does not allow for additional borrowing/lending (in GEME-E3 borrowing/lending is in real terms the balance of trade) of the country due to scenario policies but instead allows for an endogenous change of the real interest rate of the country/region. For example, in a climate policy scenario with a fixed current account as a share of GDP (fixed in baseline levels), the country/region under constraint cannot increase its imports as a reaction to increased unit cost of energy and thereby sustain levels of consumption and welfare but instead has to face an increased real interest rate.

The option of a constant current account as a percentage of GDP is activated in the model by a switch parameter.