A Heuristic Approach to the Estimation of Key Parameters for a Monthly, Recursive, Dynamic CGE Model

As economic losses brought about by natural disasters mount, assessing the economic impact of a possible future natural disaster is becoming increasingly important. A computable general equilibrium (CGE) model and an input-output (I-O) model are strong candidates for performing such an assessment. Even though a CGE model is more comprehensive and flexible than an I-O model, the CGE approach is often subject to criticism because key parameters are often not appropriately estimated. The purpose of this study is to calibrate two sets of key substitution parameters: the elasticity of substitution between labor and capital services and the elasticity of substitution among like goods of different origins, using a monthly, recursive, dynamic CGE model. For the calibration, this study employs a heuristic method, in which the model’s substitution parameters are adjusted to reproduce actual production losses from the 2011 Great East Japan Earthquake. In addition, we test whether the CGE model can reproduce the actual economic recovery from this earthquake. Overall, we find that our model does reproduce the disaster’s economic dynamics of recovery, as well as its short-term economic impact.