1 A Recursive Dynamic Computable General Equilibrium Model For ...

household income is simply the addition of ‘on-farm’ (factor payments) and ‘off-farm’ (i.e.
support payments and modulation) income sources. Thus:
(i) The rental return to ‘agricultural’ capital and land, the nominal wage on
agricultural labour (all valued at factor cost) plus the quota rent from milk and
sugar sectors.
(ii) Support payments based on the ‘subsidy wedges’ on capital (headage payments,
investment aids etc), land (set–aside, area compensation etc.), intermediate
inputs (seed payments, young farmers allowance, LFA payments etc.),
production (direct payments on olive oil, wine etc.) and export subsidies.
(iii) Modulation payments calculated on a rising scale percentage of the single farm
payment.
In the model, separate accounting equations are introduced to separate nominal on-farm
and nominal off-farm income, which are then added together to form a total farm income
aggregate. In the model, real farm income changes are calculated by deflating the nominal
equations by the consumer price index. These equations are reported merely as summary
statistics and therefore have no impact on the model solution.
6. Recursive Dynamics: Capital accumulation and investment allocation
For the construction of medium to long run forecasts, an important drawback of the
comparative static variant of ORANI is the lack of detail in determining the relationship
between investment allocation and capital accumulation over time. The recursive dynamic
extension of the ORANI model described here closely follows in spirit the characterisation
within the MONASH model (Dixon and Rimmer, 1998). The key characteristic of a
recursive dynamic model is that each solution is solved period-by-period (as opposed to an
intertemporal dynamic model where results are computed simultaneously for all periods).
Thus, the updated database for the current period becomes the starting point for the next
period.
Employing ‘stock-flow’ concepts, the underlying relationship between new
investment (flow) and the existing capital stock is given by the capital accumulation
function (dropping industry subscripts for simplicity):
K t = I t-1 – D x K t-1 (19)
where changes in the capital stock in the current period (t) are a function of changes in new
investment in the previous period (It-1) less the depreciation rate (D) on existing capital
stock in the previous period (Kt-1). In determining how new investment is allocated across
industries, the underlying hypothesis is that investors in industry ‘i’ compare expectations
33