Dynamic general equilibrium model with uncertainty: Uncertainty regarding the future path of the economy

Stephen Albert Pratt, Adam Blake, Peter Swann

Research output: Journal article publicationJournal articleAcademic researchpeer-review

12 Citations (Scopus)


This paper develops a new method for incorporating uncertainty within a computable general equilibrium (CGE) model. The method involves incorporating uncertainty into the model by formulating different states of the world or paths that the economy may take. The risk then is that on one or more of the paths, there may be an external demand shock, for example, an exogenous shock in tourism demand. The multi-sector forward-looking CGE model with risk shows the impact of uncertainty on the economy and how households and industry respond to the presence of uncertainty. The results show that, where there is an asymmetric shock, the possibility of a future tourism demand shock creates a welfare loss. The welfare gains along the non-shocked path are a result of household's risk aversion and their substituting resources away from the shocked path. The difference in the monetary values of the welfare on the different paths can be interpreted as the 'price' of the risk. It is the price households would pay to remove the possibility of the tourism shock. Therefore, this research was able to quantify the monetary value of the risk. This method can be used in scenario modelling for other adverse contingent events, such as the uncertainty of climate change impacts, and agriculture production risks.
Original languageEnglish
Pages (from-to)429-439
Number of pages11
JournalEconomic Modelling
Issue number1
Publication statusPublished - 1 May 2013


  • Computable general equilibrium model
  • Risk
  • Tourism
  • Uncertainty

ASJC Scopus subject areas

  • Economics and Econometrics


Dive into the research topics of 'Dynamic general equilibrium model with uncertainty: Uncertainty regarding the future path of the economy'. Together they form a unique fingerprint.

Cite this