Demand-Driven Structural Change in Applied General Equilibrium Models

by Roberto Roson and Dominique van der Mensbrugghe

This study analyzes the variations in industrial structure induced by income-sensitive patterns of final consumption, and how these changes can be captured by a multi-sector numerical model with a flexible demand system. We focus, in particular, on the estimation of parameters for an AIDADS (An Implicitly, Directly Additive Demand System) specification. We then test the latter by inserting in the ENVISAGE global general equilibrium dynamic model, which is run under the SSP2 scenario from 2011 to 2050. It is found that time-varying income elasticity can generate sizable variations in the industrial structure. This finding has imortant practical implications, particularly when structural models are applied at a medium and long term horizon.