The MONASH Model

A Dynamic General Equilibrium Model of the Australian Economy

Since 1993, the Centre of Policy Studies (CoPS) has developed MONASH, a dynamic computable general equilibrium (CGE) model of the Australian economy designed for forecasting and for policy analysis. Like its predecessor, ORANI, MONASH has a high level of microeconomic detail. Unlike ORANI, it has a strong forecasting capability. This is due to:

a more detailed specification of intertemporal (ie dynamic) relationships;
greater use of up-to-date data; and
enhancements which allow the model to take on information from specialist forecasting organisations and from recent historic trends.

For example, while ORANI was limited to answering comparative static questions such as: "What will be the effect on the output of motor vehicles five years after a reduction in tariffs?", MONASH in addition provides two year-by-year forecasts of motor vehicle output over the next five years, corresponding to scenarios either with or without the tariff reduction. Thus MONASH can analyse issues such as labour market dislocation or adjustment costs which other CGE models, which do not produce a base case forecast, are unable to address.

The key to generating believable forecasts is to use detailed information available from expert groups specializing in the analysis of different aspects of the economy. MONASH forecasts incorporate a wide variety of information including:

macro forecasts from the Treasury and other macro analysts;
export volume and price forecasts from the Australian Bureau of Agricultural and Resource Economics;
forecasts of tourist numbers from Bureau of Tourism Research;
forecasts of tariff rates from the Productivity Commission; and
forecasts of changes in technology and consumer tastes derived from trends calculated at CoPS.

Using this information the model generates forecasts for 113 industries and 115 commodities. These can be transformed into forecasts for 860 sub-commodities, 341 labour occupations, 56 regions and many types of households.

The initial applications of MONASH were made for State and Commonwealth government departments requiring detailed employment forecasts. The model continues to be used for this purpose. However in the last two years the main enhancements to the model have been directed at policy analysis. This has lead to papers on a wide range of issues including:

the effects of changes in tariffs on motor vehicles and on textiles, clothing and footwear;
the effects of reforms in the coal industry;
the role of water in the Australian economy;
the effects of reductions in waterfront costs;
the implications of a more open airline policy;
the implications of financing a major project such as the undergrounding of electricity and communication cables, by different types of taxes; and
the effects of a reduction in the number of foreign students coming to Australia caused by the Asian economic slowdown.