Capital evolution with five-year step

Problems with modeling
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Capital evolution with five-year step

Post by ceepbit » 2 years ago

Dear all,

I am learning to build a global CGE model, but came across some questions.
The question is about the dynamics of capital stock. According to the standard perpetual inventory assumption,
Capital Stock(t+1) = NewInvestment(t)+ (1-depreciation rate)*Capital Stock(t).
However, when considering a five-year time step, shall I modify the depreciation part from “(1-depreciation rate)” to “(1-depreciation rate)^5”?

Moreover, how shall I deal with the new investment in period t? Shall I simply multiply it with 5? That is, shall I use the following equation instead to model the dynamics of capital stock when using a five-year time?
Capital Stock(t+1) = 5*NewInvestmentt+ (1-depreciation rate)^5*Capital Stock(t).

I wonder if anyone have experiences with the recursive dynamic CGE model could spare some time to help me solve them out.
Thanks for your help!

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Re: Capital evolution with five-year step

Post by Renger » 2 years ago

Take a look at "Calibration of Models with Multi-Year Periods" on by Tom Rutherford.
Enjoy modeling even more: Read my blog on modeling at The lazy economist

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