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This paper discusses the importance of asset markets and financial flows in general equilibrium models. Asset markets and financial flows play an important role in the adjustment process to economic shocks and policy changes.
Asset markets and financial flows in general equilibrium models
About the author
Warwick McKibbin
Professor Warwick McKibbin was a Professorial Fellow at the Lowy Institute for International Policy until October 2012.
Topics
It is argued that if asset markets are not integrated into economic models, the dynamic story of adjustment will be incomplete and the usefulness of modelling results for a variety of applications will be limited. This paper provides a general outline of the MSG and G-Cubed approaches focusing on the role of asset markets and financial flows. These models have been used extensively over the past two decades to analyse the impact of various economic shocks and policy adjustments globally. A range of studies where the models have provided interesting and important insights are summarised and the key role of asset markets and financial flows in the adjustment process is highlighted.
