MENDING THE FAMILY TREE - A RECONCILIATION OF THE LINEARIZATION AND LEVELS SCHOOLS OF AGE MODELING

This paper offers a critical comparison between the North American levels school of applied general equilibrium modelling, and the Norwegian/Australian school of linearizers. The paper develops both the levels and linearized representations of a neoclassical multiregion trade model. This is used as a vehicle for focusing attention on similarities and differences between the two schools. The main conclusions are: (i) that both the levels and linearized versions of a non-linear AGE model offer a valid starting point for obtaining accurate solutions to the non-linear equilibrium problem; (ii) when update formulae are not employed, linearized representations are particularly prone to erroneous welfare conclusions; (iii) the levels representation offers a more natural starting point for expressing accounting conditions, whereas behavioural relationships are relatively more easily expressed in a linearized representation. Recent software developments now make both approaches to the representation and solution of non-linear AGE models convenient to implement. Thus the choice of which approach to use will depend on the special needs and preferences of the economist implementing the model. The two traditions of AGE modelling have a great deal in common and both would benefit from greater cooperation.