Integrating medium-term macroeconomic projections into a CGE model: the Australian experience

This paper outlines the methodology used to generate a baseline for a multi-sector computable general equilibrium (CGE) model based on macroeconomic projections of the Australian economy published by the government. A modified version of the Victorian University Multi-Region (VUMR) model is used to map projections of aggregate macroeconomic variables into sectoral output, employment and prices. The key macroeconomic indicators imposed in the baseline include Gross Domestic Product (GDP), terms of trade, population and the labour force. Projections of prices and volumes for major export commodities such as rural goods, bulk and non-bulk commodities are also imposed. This assumes output and prices of major export sectors such as mining, are largely determined in world markets. For other sectors such as non-commodity goods and services, output and prices are largely determined by domestic demand. This mapping exercise provides a robust baseline against which the effects of sectoral policies can be evaluated. Finally, a stylised scenario involving a large decline in energy commodity prices is conducted to illustrate the usefulness of the baseline. Keywords: CGE modelling, baseline, model projections, industry structure