Dynamic multi-sector CGE modeling and the specification of capital: Comment on Farmer and Wendner (2004)

Farmer and Wendner [Farmer, K., Wendner R., 2004. Dynamic multi-sector CGE modeling and the specification of capital. Structural Change and Economic Dynamics 15, pp. 469–492] discuss the impact of capital specification on policy evaluation in dynamic multi-sector computable general equilibrium (DCGE) modeling. They compare the case of a homogenous capital good with a specification allowing for two different capital goods. The capital formation process underlying the homogenous case is implausible. In order to allow a suitable assessment of the impact of capital formation, we contribute a consistent specification by explicitly modeling a production function governing the formation of the homogenous capital good. We review the results of Farmer and Wendner concerning the short and long term dynamics of both capital specifications. The corrected results validate the concerns raised by Farmer and Wendner about the impact of capital specification on policy evaluation.