The specification of price and income elasticities in computable general equilibrium models: An application of latent separability [An article from: Economic Modelling]

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Description:
This paper contributes to the ongoing debate about the specifications of price and income effects in Computable General Equilibrium models. We detail a procedure which allows to implement in such models any regular configuration of price and income effects. This procedure exploits the advantages of latent separability. By allowing some overlapping in the grouping of commodities, this separability concept offers much more flexibility than other separability structures since substitution between goods runs through many channels. This paper also provides an empirical illustration which demonstrates the applicability of our procedure and which highlights the substantial bearing of these specifications on CGE results.