| Summary: | In this paper we examine a hierarchy of CGE models for a small open economy in which each model is distinguished from its predecessor by the way in which the economy's asset markets are characterized. Each model is subjected to the same simple macroeconomic policy shock. We emphasise two different features of assets markets, those involving real portfolio effects and those involving nominal effects (money demand, wealth effects, capital gains, and intermediation): the differential impact of these on the performance of the real economy is examined. We argue that although fully articulated asset market models encounter formidable conceptual as well as calibration problems, which may limit their utility, there are large gains to be had from incorporating at least some limited treatment of assets (for example in a relatively basic portfolio model) in the analysis of macroeconomic policy shocks.
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