Balanced Budget Government Spending in a Small Open Regional Economy

This paper investigates the impact of a balanced budget fiscal policy expansion in a regional context within a numerical dynamic general equilibrium model. We take Scotland as an example where, recently, there has been extensive debate on greater fiscal autonomy. In response to a balanced budget fiscal expansion the model suggests that: an increase in current government purchase in goods and services has negative multiplier effects only if the elasticity of substitution between private and public consumption is high enough to move downward the marginal utility of private consumers; public capital expenditure crowds in consumption and investment even with a high level of congestion; but crowding out effects might arise in the short-run if agents are myopic.

An HEI-Disaggregated Input-Output Table for Wales

This paper describes how the education sector of the Welsh Input-Output tables is disaggregated to identify a separate sector for each of Wales’s twelve Higher Education Institutions (HEIs). The process draws on accounting and survey data to accurately determine the incomes and expenditures of each institution. In particular we emphasise determining the HEIs incomes source of origin to inform their treatment, as endogenous or exogenous, in subsequent analyses. The HEI-disaggregated Input-Output table provides a useful descriptive snapshot of the Welsh economy and the role of HEIs within it for a particular year, 2006. The table can be used to derive multipliers and conduct various impact studies of each institution or the sector as a whole. The table is furthermore useful to calibrate other multi-sectoral, HEI-disaggregated models of regional economies, including Social Accounting Matrix (SAM) and computable general equilibrium (CGE) models.

“Policy Scepticism” and the Impact of Welsh Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints

This paper replicates the analysis of Scottish HEIs in Hermannsson et al (2010b) for the case of Wales in order to provide a self-contained analysis that is readily accessible by those whose primary concern is with the regional impacts of Welsh HEIs. A “policy scepticism” has emerged that challenges the results of conventional regional HEI impact analyses. This denial of the importance of the expenditure impacts of HEIs appears to be based on a belief in either a binding regional resource constraint or a regional public sector budget constraint. In this paper we provide a systematic critique of this policy scepticism. However, while rejecting the extreme form of policy scepticism, we argue that it is crucial to recognise the importance of the publicsector expenditure constraints that are binding under devolution. We show how conventional impact analyses can be augmented to accommodate regional public sector budget constraints. While our results suggest that conventional impact studies overestimate the expenditure impacts of HEIs, they also demonstrate that the policy scepticism that treats these expenditure effects as irrelevant neglects some key aspects of HEIs, in particular their export intensity.

“Policy Scepticism” and the Impact of Northern Irish Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints

This paper replicates the analysis of Scottish HEIs in Hermannsson et al (2010b) for the case of Northern Ireland. The motivation is to provide a self-contained analysis that is readily accessible by those whose primary concern is with the regional impacts of Northern Irish HEIs. A comparative analysis will follow in due course. A “policy scepticism” has emerged that challenges the results of conventional regional HEI impact analyses. This denial of the importance of the expenditure impacts of HEIs appears to be based on a belief in either a binding regional resource constraint or a regional public sector budget constraint. In this paper we provide a systematic critique of this policy scepticism. However, while rejecting the extreme form of policy scepticism, we argue that it is crucial to recognise the importance of the public sector expenditure constraints that are binding under devolution. We show how conventional impact analyses can be augmented to accommodate regional public sector budget constraints. While our results suggest that conventional impact studies overestimate the expenditure impacts of HEIs, they also demonstrate that the policy scepticism that treats these expenditure effects as irrelevant neglects some key aspects of HEIs, in particular their export intensity.

The Importance of Graduates for the Scottish Economy: A “Micro-to-Macro” Approach

There have been numerous attempts to assess the overall impact of Higher Education Institutions on regional economies in the UK and elsewhere. There are two disparate approaches focussing on: demand-side effects of HEIs, exerted through universities’ expenditures within the local economy; HEIs’ contribution to the “knowledge economy”. However, neither approach seeks to measure the impact on regional economies that HEIs exert through the enhanced productivity of their graduates. We address this lacuna and explore the system-wide impact of the graduates on the regional economy. An extensive and sophisticated literature suggests that graduates enjoy a significant wage premium, often interpreted as reflecting their greater productivity relative to non-graduates. If this is so there is a clear and direct supply-side impact of HEI activities on regional economies through the employment of their graduates. However, there is some dispute over the extent to which the graduate wage premium reflects innate abilities rather than the impact of higher education per se. We use an HEI-disaggregated computable general equilibrium model of Scotland to estimate the impact of the growing proportion of graduates in the Scottish labour force that is implied by the current participation rate and demographic change, taking the graduate wage premium in Scotland as an indicator of productivity enhancement. We conduct a range of sensitivity analyses to assess the robustness of our results. While the detailed results do, of course, vary with alternative assumptions about future graduate retention rates and the size of the graduate wage premium, for example, they do suggest that the long-term supply-side impacts of HEIs provide a significant boost to regional GDP. Furthermore, the results suggest that the supply-side impacts of HEIs are likely to be more important than the expenditure impacts that are the focus of most “impact” studies.

The Expenditure Impacts of Individual Higher Education Institutions (HEIs) and their Students on the Welsh Economy: Homogeneity or Heterogeneity?

This paper replicates the analysis of Scottish HEIs in Hermannsson et al (2010a) for the case of Wales in order to provide a self-contained analysis that is readily accessible by those whose primary concern is with the regional impacts of Welsh HEIs. When we treat each of the twelve Higher Education Institutions (HEIs) that existed in Wales in 2006 as separate sectors in conventional input-output analysis, their expenditure impacts per unit of final demand appear rather homogenous, with the apparent heterogeneity of their overall impacts being primarily driven by scale. However, a disaggregation of their income by source reveals considerable variation in their dependence upon funding from the devolved Welsh Assembly Government and their ability to draw in income/funding from external sources. Acknowledging the binding budget constraint of the Welsh Assembly Government and deriving balanced expenditure multipliers reveals large differences in the net-expenditure impact of HEIs upon the Welsh economy, with the source of variation being the origin of income. Applying a novel treatment of student expenditure impacts, identifying the amount of exogenous spending per student, modifies the heterogeneity of the overall expenditure impacts. On balance this suggests that the impacts of impending budget cut-backs will be quite different by institution depending on their sensitivity to public funding. However, predicting the outcome of budget cutbacks at the margin is problematic for reasons that we identify.

“Policy Scepticism” and the Impact of London-based Higher Education Institutions (HEIs) on the economy of England: Accounting for Alternative Uses of Public Expenditure

This paper replicates the analysis of Scottish HEIs in Hermannsson et al (2010a) for the case of London-based HEIs’ impact on the English economy in order to provide a self-contained analysis that is readily accessible by those whose primary concern is with the regional impacts of London HEIs. A “policy scepticism” has emerged that challenges the results of conventional regional HEI impact analyses. This denial of the importance of the expenditure impacts of HEIs appears to be based on a belief in either a binding regional resource constraint or a regional public sector budget constraint. In this paper we provide a systematic critique of this policy scepticism. However, while rejecting the extreme form of policy scepticism, we argue that it is crucial to recognise the importance of alternative uses of public expenditure, and show how conventional impact analyses can be augmented to accommodate this. While our results suggest that conventional impact studies overestimate the expenditure impacts of HEIs, they also demonstrate that the policy scepticism that treats these expenditure effects as irrelevant neglects some key aspects of HEIs, in particular their export intensity.

The Expenditure Impacts of London-based Individual Higher Education Institutions (HEIs) and their Students on the Economy of England: Homogeneity or Heterogeneity?

This paper replicates the analysis of Scottish HEIs in Hermannsson et al (2010a) to identify the impact of London-based HEIs on the English economy in order to provide a self-contained analysis that is readily accessible by those whose primary concern is with the regional impacts of London HEIs. When we treat each of the 38 London-based Higher Education Institutions (HEIs) that existed in England in 2006 as separate sectors in conventional input-output analysis, their expenditure impacts per unit of final demand appear rather homogenous (though less so than HEIs in Wales and Scotland), with the apparent heterogeneity of their overall impacts being primarily driven by scale. However, a disaggregation of their income by source reveals considerable variation in their dependence upon general public funding and their ability to draw in income/funding from external sources. Acknowledging the possible alternative uses of the public funding and deriving balanced expenditure multipliers reveals large differences in the net-expenditure impact of London HEIs upon the English economy, with the source of variation being the origin of income. Applying a novel treatment of student expenditure impacts, identifying the amount of exogenous spending per student, modifies the heterogeneity of the overall expenditure impacts. On balance this suggests that the impacts of impending budget cut-backs will be quite different by institution depending on their sensitivity to public funding. However, predicting the outcome of budget cutbacks at the margin is problematic for reasons that we identify.

Microstructure Order Flow: Statistical and Economic Evaluation of Nonlinear Forecasts

In this paper we propose a novel empirical extension of the standard market microstructure order flow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two di¤erent data sets and focusing on out- of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We nd there is a substantial economic value on conditioning on the proposed models.

Rebound Effects from Increased Efficiency in the Use of Energy by UK Households

In this paper, we use CGE modelling techniques to identify the impact on energy use of an improvement in energy efficiency in the household sector. The main findings are that 1) when the price of energy is measured in natural units, the increase in efficiency yields only to a modification of tastes, changing as a result, the composition of household consumption; 2) when households internalize efficiency, the improvement in energy efficiency reduces the price of energy in efficiency units, providing a source of improved competitiveness as the nominal wage and the price level both fall; 3) the short-run rebound can be greater than the long run rebound if the household demand elasticity is the same for both time frames, however, the short run rebound is always lower than in the long-run if the demand for energy is relatively more elastic in the long-run; 4) the introduction of habit formation changes the composition of household consumption, modifying the magnitude of the household rebound only in the short-run. In this period, household and economy wide rebound are lowest for external habit formation and highest when consumers’ preferences are defined using a conventional utility function.

Regional Policy Spillovers: The National Impact of Demand-Side Policy in an Interregional Model of the UK Economy

UK regional policy has been advocated as a means of reducing regional disparities and stimulating national growth. However, there is limited understanding of the interregional and national effects of such a policy. This paper uses an interregional computable general equilibrium model to identify the national impact of a policy-induced regional demand shock under alternative labour market closures. Our simulation results suggest that regional policy operating solely on the demand side has significant national impacts. Furthermore, the effects on the non-target region are particularly sensitive to the treatment of the regional labour market.

A Producer Theory with Business Risks

In this paper, we consider a producer who faces uninsurable business risks due to incomplete spanning of asset markets over stochastic goods market outcomes, and examine how the presence of the uninsurable business risks affects the producer's optimal pricing and production behaviours. Three key (inter-related) results we find are: (1) optimal prices in goods markets comprise ‘markup’ to the extent of market power and ‘premium’ by shadow price of the risks; (2) price inertia as we observe in data can be explained by a joint work of risk neutralization motive and marginal cost equalization condition; (3) the relative responsiveness of risk neutralization motive and marginal cost equalization at optimum is central to the cyclical variation of markups, providing a consistent explanation for procyclical and countercyclical movements. By these results, the proposed theory of producer leaves important implications both micro and macro, and both empirical and theoretical.

Forward Looking and Myopic Regional Computable General Equilibrium Models. How Significant is the Distinction?

We present a stylized intertemporal forward-looking model able that accommodates key regional economic features, an area where the literature is not well developed. The main difference, from the standard applications, is the role of saving and its implication for the balance of payments. Though maintaining dynamic forward-looking behaviour for agents, the rate of private saving is exogenously determined and so no neoclassical financial adjustment is needed. Also, we focus on the similarities and the differences between myopic and forward-looking models, highlighting the divergences among the main adjustment equations and the resulting simulation outcomes.

The system-wide impacts of the external benefits to higher education on the Scottish economy: An exploratory “micro-to-macro” approach

The private market benefits of education, i.e. the wage premia of graduates, are widely studied at the micro level, although the magnitude of their macroeconomic impact is disputed. However, there are additional benefits of education, which are less well understood but could potentially drive significant macroeconomic impacts. Following the taxonomy of McMahon (2009) we identify four different types of benefits of education. These are: private market benefits (wage premia); private non market benefits (own health, happiness, etc.); external market benefits (productivity spillovers; and external non-market benefits (crime rates, civic society, democratisation, etc.). Drawing on available microeconometric evidence we use a micro-to-macro simulation approach (Hermannsson et al, 2010) to estimate the macroeconomic impacts of external benefits of higher education. We explore four cases: technology spillovers from HEIs; productivity spillovers from more skilled workers in the labour market; reduction in property crime; and the potential overall impact of external and private non-market benefits. Our results suggest that the external economic benefits of higher education could potentially be very large. However, given the dearth of microeconomic evidence this result should be seen as tentative. Our aim is to illustrate the links from education to the wider economy in principle and encourage further research in the field.

The added value from a general equilibrium analyses of increased efficiency in household energy use

The aim of the paper is to identify the added value from using general equilibrium techniques to consider the economy-wide impacts of increased efficiency in household energy use. We take as an illustrative case study the effect of a 5% improvement in household energy efficiency on the UK economy. This impact is measured through simulations that use models that have increasing degrees of endogeneity but are calibrated on a common data set. That is to say, we calculate rebound effects for models that progress from the most basic partial equilibrium approach to a fully specified general equilibrium treatment. The size of the rebound effect on total energy use depends upon: the elasticity of substitution of energy in household consumption; the energy intensity of the different elements of household consumption demand; and the impact of changes in income, economic activity and relative prices. A general equilibrium model is required to capture these final three impacts.