Achieving current account balance in long-run projections of the global economy in the dynamic GTAP model

A dynamic version of the GTAP model characterised by a stable long-run baseline became available in 2021. This dynamic model, known as GDyn-FS, builds on the earlier GDyn model released in 2012 to, amongst other things, project a stable long-run baseline with non-convex adjustment costs and forward looking consumers and producers. In a longer-term dynamic environment, however, without explicit modelling, current account balances across regions as a proportion of GDP can deviate from initial values without bounds. Such deviations are contrary to commonly regarded policy bounds on such balances of within 5 percent of GDP. This paper further develops the GDyn-FS model to ensure that current account balances as a proportion of GDP remain within predetermined target range across projection periods reaching as far as 2100, while ensuring capital inflows are matched at a global level by capital outflows in each year. For this modelling, the reference (or target) values for current account balances across regions are drawn from historical experience or postulated on the basis of expectations regarding the course of economic development across countries or regions. The development provides a viable and policy focused method for the projection of long-run baselines inclusive of conventional foreign account constraints and assessments of the progression of regional economies, trade and investment between regions through time. Some key areas for further research are identified.