Modelling Trade Policy Scenarios: Different Horses for Different Courses

Recent major economic shocks such as Brexit, US-China trade tensions, the COVID-19 pandemic and the Russian sanctions have led to renewed interest in the impact of trade policies and trade disruption on macroeconomic variables. The scale of these events has meant that quantification can spill across defined demarcations of specific policy models. This paper aims to provide an in-depth comparison of model structures and scenario outcomes in two commonly used approaches in the policy field, a computable general equilibrium (CGE) model and a dynamic macro model. Employing a stylised tariff and labour supply shock, the focus is on outcomes that originate from differing model structures and theoretical frameworks. The results highlight the different mechanisms at work and that these can lead to divergent outcomes for headline policy variables. Much of the differences can be attributed to two main modelling features: (1) the treatment of monopolistic competition and mark-up pricing in the macro model versus price taking in the CGE model, and (2) the concept of dynamic stock-flow equilibrium in the macro model versus equilibrium in flows in the CGE model. The results highlights the potential downsides to relying on a single modelling framework when trying to quantify a wide variety of policy-relevant scenarios.