Applied general equilibrium modelling: achievement, failure and potential

Over the last twenty years, applied general equilibrium models (AGEMs) have provided useful insights on the likely effects of disturbances in one part of the economy on activity in other parts; e.g. the effects of changes in manufacturing protection on exports of mineral products. On the other hand, AGEM-based analyses of the welfare effects of proposed policy changes have been unconvincing. Nor have forecasts derived from AGE models provided satisfactory guidance to people concerned with investment and other business decisions. This paper explains these views and discusses the research required to move AGE modelling closer to its full potential.