A General Equilibrium Appraisal of Energy Policy in Mexico

This paper develops a static neoclassical general equilibrium model of the Mexican economy that focuses on production, consumption, and exports of energy goods. The specification of the model allows the government to set prices and production levels of energy goods exogenously. Domestic prices differ from international prices, and net exports of these goods are determined residually. The level of energy exports is a major factor in the determination of the government and trade deficits. The analysis presented in this paper serves as a case study of how to design and use an applied general equilibrium model to do policy analysis. An interesting feature is that the model itself is used to determine one of the key parameters, the elasticity of substitution of non-energy imports for domestic goods.