The paper is divided in two parts. In the first part, the paper describes the theoretical underpinning of computable general equilibrium (CGE) models and their use for policy analysis. Being based on market clearing assumptions, CGE models are a powerful tool to study the impact of structural reforms affecting relative prices. Data requirements are not necessarily stringent as the degree of sectoral disaggregation/ structural detail can be chosen in accordance with data availability, without substantially endangering model results. Moreover, structural parameters such as the elasticities of substitution and transformation can be derived outside the model not necessarily requiring the availability of long time series. For all these reasons CGE models are particularly suitable for the analysis of structural reform in normally data-poor developing countries. In the second part, the paper describes the construction and characteristics of a CGE model for Nepal. To describe its transmission mechanisms, the model is simulated for a devaluation, a terms-of-trade shock and a change in foreign capital inflows. The model is then utilized to analyze the impact of a tariff reform and of two large hydropower projects.
Revised November 30, 1994. Most of the research for the paper was done while the authors were working at the Asian Development Bank, Programs Department (West), as consultant and economist, respectively.
