About the MSG3 Model

The MSG3 model replaces the MSG2 originally developed by  McKibbin and Sachs (1991). This new model is an aggregation of the G-Cubed model to 2 sectors of production (energy/non-energy) in each economy. It is therefore very similar in sectoral and country coverage to the MSG2 model but includes many of the features of the G-Cubed model. 

The main features of the new MSG3 model relative to the MSG2 model are:

• A better mapping of the energy flows in the economy based on country specific input-output data from the G-Cubed database.
• Estimated production technologies based on the G-Cubed 12 sector aggregation are aggregated to the two sector level. We believe that this gives a better depiction of the aggregate production substitution possibilities than in the MSG2 model which assumed a Cobb-Douglas specification.
• Explicit treatment of capital goods in the household and firm sectors. Because the MSG3 model is based on G-Cubed, we also have two additional sectors which create capital goods for investment by firms and capital goods for investment by households. This structural depiction of economies enables a closer examination of the impact of computers and other capital goods investment on overall economic activity globally.
• There are no residual country blocks in the MSG3 model. We have developed detailed structural models for the former Soviet Union, oil exporting developing countries and non-oil developing countries. This enables a much wider range of scenario analysis related to these parts of the world as well as giving a better representation of the feedback from these regions to the industrialized economies.
• Improvedonline documentation and simulation software.

The MSG3 model has been constructed to contribute to the current policy debate on macroeconomic policy design in different economies. It is a world model with substantial regional disaggregation and some sectoral detail. In addition, countries and regions are linked both temporally and intertemporally through trade and financial markets. Like the MSG2 and G-Cubed models, the MSG3 model contains a strong foundation for analysis of both short run macroeconomic policy analysis as well as long run growth consideration of alternative macroeconomic policies. Intertemporal budget constraints on households, governments and nations (the latter through accumulations of foreign debt) are imposed. To accommodate these constraints, forward looking behavior is incorporated in consumption and investment decisions. Overall, the model is designed to provide a bridge between computable general equilibrium models and macroeconomic models by integrating the more desirable features of both approaches. Details on this integration and how G-cubed bridges the gap between CGE and traditional macro-econometric models can be found in McKibbin (1993b).

The Structure of the Model

The MSG3 model follows the structure of the G-Cubed model with sectors aggregated from 12 to 2 sectors (energy and non-energy).

In particular the reader should refer to the paper by McKibbin W and Wilcoxen P (2013), A Global Approach to Energy and the Environment: The G-cubed Model” Handbook of CGE Modeling, Chapter 17, North Holland, pp 995-1068.