Building a Social Accounting Matrix within the ESA95 Framework: Obtaining a Dataset for Applied General Equilibrium Modelling

This research provides a description of the process followed in order to assemble a "Social Accounting Matrix" for Spain corresponding to the year 2000 (SAMSP00). As argued in the paper, this process attempts to reconcile ESA95 conventions with requirements of applied general equilibrium modelling. Particularly, problems related to the level of aggregation of net taxation data, and to the valuation system used for expressing the monetary value of input-output transactions have deserved special attention. Since the adoption of ESA95 conventions, input-output transactions have been preferably valued at basic prices, which impose additional difficulties on modellers interested in computing applied general equilibrium models. This paper addresses these difficulties by developing a procedure that allows SAM-builders to change the valuation system of input-output transactions conveniently. In addition, this procedure produces new data related to net taxation information.

Building a Social Accounting Matrix within the ESA95 Framework: Obtaining a Dataset for Applied General Equilibrium Modelling

This research provides a description of the process followed in order to assemble a "Social Accounting Matrix" for Spain corresponding to the year 2000 (SAMSP00). As argued in the paper, this process attempts to reconcile ESA95 conventions with requirements of applied general equilibrium modelling. Particularly, problems related to the level of aggregation of net taxation data, and to the valuation system used for expressing the monetary value of input-output transactions have deserved special attention. Since the adoption of ESA95 conventions, input-output transactions have been preferably valued at basic prices, which impose additional difficulties on modellers interested in computing applied general equilibrium models. This paper addresses these difficulties by developing a procedure that allows SAM-builders to change the valuation system of input-output transactions conveniently. In addition, this procedure produces new data related to net taxation information.

Financial reforms and capital flows: Insights from general equilibrium

As a result of debt enforcement problems, many high-productivity firms in emergingeconomies are unable to pledge enough future profits to their creditors and this constrains thefinancing they can raise. Many have argued that, by relaxing these credit constraints, reformsthat strengthen enforcement institutions would increase capital flows to emerging economies. Thisargument is based on a partial equilibrium intuition though, which does not take into account theorigin of any additional resources that flow to high-productivity firms after the reforms. We showthat some of these resources do not come from abroad, but instead from domestic low-productivityfirms that are driven out of business as a result of the reforms. Indeed, the resources released bythese low-productivity firms could exceed those absorbed by high-productivity ones so that capitalflows to emerging economies might actually decrease following successful reforms. This resultprovides a new perspective on some recent patterns of capital flows in industrial and emergingeconomies.

The behavior of money velocity in low and high inflation countries

This paper presents a general equilibrium model of money demand where the velocity of money changes in response to endogenous fluctuations in the interest rate. The parameter space can be divided into two subsets: one where velocity is constant as in standard cash-in-advance models, and another one where velocity fluctuates as in Baumol (1952). The model provides an explanation of why, for a sample of 79 countries, the correlation between the velocity of money and the inflation rate appears to be low, unlike common wisdom would suggest. The reason is the diverse transaction technologies available in different economies.

Una estimación del coste marginal en bienestar del sistema impositivo en España

Actual tax systems do not follow the normative recommendations of yhe theory of optimal taxation. There are two reasons for this. Firstly, the informational difficulties of knowing or estimating all relevant elasticities and parameters. Secondly, the political complexities that would arise if a new tax implementation would depart too much from current systems that are perceived as somewhat egalitarians. Hence an ex-novo overhaul of the tax system might just be non-viable. In contrast, a small marginal tax reform could be politically more palatable to accept and economically more simple to implement. The goal of this paper is to evaluate, as a step previous to any tax reform, the marginal welfare cost of the current tax system in Spain. We do this by using a computational general equilibrium model calibrated to a point-in-time micro database. The simulations results show that the Spanish tax system gives rise to a considerable marginal excess burden. Its order of magnitude is of about 0.50 money units for each additional money unit collected through taxes.

Sensitivity of simulation results to competing SAM updates

Recently there has been a renewed research interest in the properties of non survey updates of input-output tables and social accounting matrices (SAM). Along with the venerable and well known scaling RAS method, several alternative new procedures related to entropy minimization and other metrics have been suggested, tested and used in the literature. Whether these procedures will eventually substitute or merely complement the RAS approach is still an open question without a definite answer. The performance of many of the updating procedures has been tested using some kind of proximity or closeness measure to a reference input-output table or SAM. The first goal of this paper, in contrast, is the proposal of checking the operational performance of updating mechanisms by way of comparing the simulation results that ensue from adopting alternative databases for calibration of a reference applied general equilibrium model. The second goal is to introduce a new updatin! g procedure based on information retrieval principles. This new procedure is then compared as far as performance is concerned to two well-known updating approaches: RAS and cross-entropy. The rationale for the suggested cross validation is that the driving force for having more up to date databases is to be able to conduct more current, and hopefully more credible, policy analyses.

The role of central bank operating procedures in an economy with productive government spending

The choice of either the rate of monetary growth or the nominal interest rate as the instrument controlled by monetary authorities has both positive and normative implications for economic performance. We reexamine some of the issues related to the choice of the monetary policy instrument in a dynamic general equilibrium model exhibiting endogenous growth in which a fraction of productive government spending is financed by means of issuing currency. When we evaluate the performance of the two monetary instruments attending to the fluctuations of endogenous variables, we find that the inflation rate is less volatile under nominal interest rate targeting. Concerning the fluctuations of consumption and of the growth rate, both monetary policy instruments lead to statistically equivalent volatilities. Finally, we show that none of these two targeting procedures displays unambiguously higher welfare levels.

Calibration of CES functions for real-world multisectoral modeling

We show how to calibrate CES production and utility functions when indirect taxation affecting inputs and consumption is present. These calibrated functions can then be used in computable general equilibrium models. Taxation modifies the standard calibration procedures since any taxed good has two associated prices and a choice of reference value units has to be made. We also provide an example of computer code to solve the calibration of CES utilities under two alternate normalizations. To our knowledge, this paper fills a methodological gap in the CGE literature.

The Role of supply constraints in multiplier analysis

Multiplier analysis based upon the information contained in Leontief's inverse is undoubtedly part of the core of the input-output methodology and numerous applications an extensions have been developed that exploit its informational content. Nonetheless there are some implicit theoretical assumptions whose implications have perhaps not been fully assessed. This is the case of the 'excess capacity' assumption. Because of this assumption resources are available as needed to adjust production to new equilibrium states. In real world applications, however, new resources are scarce and costly. Supply constraints kick in and hence resource allocation needs to take them into account to really assess the effect of government policies. Using a closed general equilibrium model that incorporates supply constraints, we perform some simple numerical exercises and proceed to derive a 'constrained' multiplier matrix that can be compared with the standard 'unrestricted' multiplier matrix. Results show that the effectiveness of expenditure policies hinges critically on whether or not supply constraints are considered.

Procompetitive Losses from Trade

We argue that the procompetitive effect of international trade may bring about significant welfare costs that have not been recognized. We formulate a stylized general equilibrium model with a continuum of imperfectly competitive industries to show that, under plausible conditions, a trade-induced increase in competition can actually amplify monopoly distortions. This happens because trade, while lowering the average level of market power, may increase its cross-sectoral dispersion. Using data on US industries, we document a dramatic increase in the dispersion of market power overtime. We also show evidence that trade might be responsible for it and provide some quantifications of the induced welfare cost. Our results suggest that, to avoid some unpleasant effects of globalization, trade integration should be accompanied by procompetitive reforms (i.e., deregulation) in the nontraded sectors.

Competing engines of growth: Innovation and standardization

We study a dynamic general equilibrium model where innovation takes theform of the introduction of new goods whose production requires skilled workers.Innovation is followed by a costly process of standardization, whereby these newgoods are adapted to be produced using unskilled labor. Our framework highlightsa number of novel results. First, standardization is both an engine of growth anda potential barrier to it. As a result, growth is an inverse U-shaped function ofthe standardization rate (and of competition). Second, we characterize the growthand welfare maximizing speed of standardization. We show how optimal protection of intellectual property rights affecting the cost of standardization vary withthe skill-endowment, the elasticity of substitution between goods and other parameters. Third, we show that, depending on how competition between innovatingand standardizing firms is modelled and on parameter values, a new type of multiplicity of equilibria may arise. Finally, we study the implications of our model forthe skill-premium and we illustrate novel reasons for linking North-South trade tointellectual property rights protection.

Corporate finance and the monetary transmission mechanism

This paper analyzes the transmission mechanisms of monetarypolicy in a general equilibrium model of securities marketsand banking with asymmetric information. Banks' optimal asset/liability policy is such that in equilibrium capital adequacy constraints are always binding. Asymmetric information about banks' net worth adds a cost to outside equity capital, which limits the extent to which banks can relax their capital constraint. In this context monetarypolicy does not affect bank lending through changes in bank liquidity. Rather, it has the effect of changing theaggregate composition of financing by firms. The model also produces multiple equilibria, one of which displays all the features of a "credit crunch". Thus, monetary policy can also have large effects when it induces a shift from one equilibrium to the other.

Aggregate consequences of limited contract enforceability

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.

Trade, markup heterogeneity and misallocations

We argue that the procompetitive effect of international trade may bring about significant welfare costs that have not been recognized. We formulate a stylized general equilibrium model with a continuum of imperfectly competitive industries to show that, under plausible conditions, a trade-induced increase in competition can actually amplify monopoly distortions. This happens because trade, while lowering the average level of market power, may increase its cross-sectoral dispersion. Using data on US industries, we document a dramatic increase in the dispersion of market power overtime. We also show evidence thattrade might be responsible for it and provide some quantifications of the induced welfare cost. Our results suggest that, to avoid some unpleasant effects of globalization, trade integration should be accompanied by procompetitive reforms (i.e., deregulation) in the nontraded sectors.

Entrepreneurial risk, investment and innovation

In this paper I develop a general equilibrium model with risk averse entrepreneurialfirms and with public firms. The model predicts that an increase in uncertainty reducesthe propensity of entrepreneurial firms to innovate, while it does not affect thepropensity of public firms to innovate. Furthermore, it predicts that the negativeeffect of uncertainty on innovation is stronger for the less diversified entrepreneurialfirms, and is stronger in the absence of financing frictions in the economy. In thesecond part of the paper I test these predictions on a dataset of small and mediumItalian manufacturing firms.