Hunting the unobservables for optimal social security a general equilibrium approach

We study the optimal size of a pay-as-you-go social security program for an economy composed of both permanent-income and hand-to-mouth consumers. While previous work on this topic is framed within a two-period partial equilibrium setup, we study this issue in a life-cycle general equilibrium model. Because this type of welfare analysis depends critically on unobservable preference parameters, we methodically consider all parameterizations of the unobservables that are both feasible and reasonable—all parameterizations that can mimic key features of macro data (feasible) while still being consistent with micro evidence and convention (reasonable). The baseline model predicts that the optimal tax rate is between 6 percent and 15 percent of wage income.

Doubling fish exports or garment exports : which would benefit the Fijian economy most? Evidence from a computable general equilibrium model

The need to diversify Fiji's export base has been identified as an important avenue for reducing Fiji's vulnerabilities in international trade. This paper poses the question: Doubling fish exports or garment exports: which would be most beneficial for the Fijian economy? To achieve the goal of this paper, the computable general equilibrium model is used, this being at the forefront of research on 'impact studies'. The main finding is that when garment exports and fish exports are doubled, the benefits to the Fijian economy are greater from garment exports, suggesting that the latter has stronger linkages with the rest of the economy. On the basis of this finding, policymakers should divert resources towards sustaining the garment industry whose future is uncertain due to expiring trade agreements and unstable economic policies.

Trade and industrial policy in developing countries : what scope for interfaces between agent-based models and computable-general equilibrium models

How best to assess trade and industrial policy in developing countries is a controversial question that unlocks a host of modelling complexities. Large computable general-equilibrium (CGE) models dominate many economic policy debates, but recent developments in the field have demonstrated that it is by no means clear that they give reliable results to questions of how trade reforms affect the poor. Over the last decade or so, a new approach to modelling complex systems has emerged using agent-based models (ABMs). This paper explores the question of whether ABMs are useful for economic policy-makers seeking to quantitatively model the effects of trade and industrial policies and whether constructive interfaces could be developed between CGE models and ABMs. The paper argues that in developing economic policy, ABMs can and should be used in conjunction with CGE models and that there is much to be gained from a greater understanding of the strengths and weaknesses of different modelling approaches, and what domains are most appropriate for their use. It concludes with some reflections on the reasons for the success of CGE approaches and ways in which ABMs could be made more widely understood and used among economists.

Myopia and pensions in general equilibrium

The US social security tax rate has doubled in the last half century.

Does the degree of myopic behavior that we observe in the US justify the size of the social security program? To study this question we build a computable general equilibrium model that is composed of life-cycle permanent-income consumers who save optimally and “hand-to-mouth” consumers who just consume their disposable income. Our model is a continuous-time, general equilibrium extension of the model by Cremer et al. (Int Tax Public Financ 15(5):547–562, 2008), though we abstract from the redistributive function of social security to focus on myopia. Retirement is a choice variable in our model and the social security program is designed to mimic the US program in which the annuity value of benefits increases with the retirement age. Also, we allow for delayed claiming beyond the date of retirement. The model matches a variety of important data targets relating to saving and retirement. We find that small reductions in the social security tax rate provide significant welfare gains to both groups of consumers.

Optimal second best taxation of addictive goods in dynamic general equilibrium: a revenue raising perspective

In this paper we derive conditions under which optimal tax rates for addictive goods exceed tax rates for non-addictive consumption goods within a rational addiction framework where exogenous government spending cannot be financed with lump sum taxes. We reexamine classic results on optimal commodity taxation and find a rich set of new findings. Two dynamic effects exist. First, households anticipating higher future addictive tax rates reduce current addictive consumption, so they will be less addicted when the tax rate increases. Therefore, addictive tax revenue falls prior to the tax increase. Surprisingly, the optimal tax rate on addictive goods is generally decreasing in the strength of tolerance, since strong tolerance strengthens this tax anticipation effect. Second, high current tax rates on addictive goods make households less addicted in the future, affecting all future tax revenues in a way which depends on how elasticities are changing over time. Classic results on uniform commodity taxation emerge as special cases when elasticities are constant and the addiction function is homogeneous of degree one. Finally, we also study features of addictive goods such as complementarity to leisure that, while not directly related to the definition of addiction, are nonetheless properties many addictive goods display.

The shadow economy as an equilibrium outcome

We construct a dynamic general equilibrium model of tax evasion where agents choose to report some of their income. Unreported income requires using a payment method that avoids recordkeeping in some markets-cash. Trade using cash to avoid taxes is the 'shadow economy' in our model. We then calibrate our model using money, interest rate and GDP data to back out the size of the shadow economy for a sample of countries and compare our measures to traditional reduced form estimates. © 2014 Elsevier B.V.

Tourism, trade and domestic welfare

Tourism has been regarded as a major source of economic growth and a source of foreign exchange. It has also been viewed as an activity that imposes costs on the host country. Such costs include increased pollution, congestion and despoliation of fragile environments, and intra-generational inequity aggravation. One aspect that has been ignored is the general equilibrium effects of tourism on other sectors in the economy. This paper presents a model that captures the interdependence between tourism and the rest of the economy, in particular agriculture and manufacturing. An important result obtained is that the tourist boom may 'immiserize' the residents.

Government revenue, private welfare, and tax reform in a small open economy

This paper examines the welfare and revenue effects of consumption and income taxes in a general equilibrium model with variable supply of labour and public goods. We derive the optimal consumption and income tax rates for such an economy. It is established that it is better to lower the income tax rate and increase the rate of consumption tax when this economy is in a downturn.

Costs of inflation in Australia and New Zealand.

This paper evaluates the costs of inflation in Australia and New Zealand using a compensated measure calculated by calibrating a general equilibrium search model in the vein of Lagos and Wright (2005). We look at how inflation affects the intensive margin (the quantity traded in each match) by examining the impact of various pricing protocols. We also look at how inflation affects the extensive margin (the number of trades) by making the market composition between buyers and sellers endogenous. We obtain much larger costs of inflation than existing studies, but smaller costs than similar studies conducted on the US economy. Depending on the version of the model the costs of 10% inflation for a $50,000 worker ranges from $250 to $2200 per year in Australia, and from $200 to $1700 in New Zealand, that is between 0.5% and 4.4% of GDP and between 0.4% and 3.4% of GDP respectively. Finally it is calculated that Australia could gain up to 1.6% of GDP per annum--1.2% for New Zealand--by implementing the Friedman rule.

An econometric model of the determinants of private investment and a CGE model of the impact of democracy on investment and economic growth in Fiji

Purpose – The purpose of this paper is to construct an econometric model of the determinants of private investment with a particular focus on the impact of democracy on investment.

Design/methodology/approach – The first step was to econometrically derive the long-run elasticities; then to modify the Fiji computable general equilibrium (CGE) model to incorporate the investment function. Also the econometrically derived long run elasticities in the CGE model were used.

Findings – It was found that democracy has a positive and statistically significant impact on private investment in Fiji. The paper's simulation of Fiji becoming a fully democratic country on investment and other macroeconomic fundamentals, based on a CGE model, reveals that real gross domestic product and real national welfare increase by around 0.01 and 0.05 per cent, respectively; government savings and revenue performance improves; there is a trade balance surplus; and both private consumption and disposable income increase by around 0.05 and 0.12 per cent, respectively.

Originality/value – This is the first study that uses a CGE model to examine the impact of democracy, via investment, on other macroeconomic fundaments. No other study is known to have modelled democracy in a CGE framework.

Macroeconomic impact of natural disasters on a small island economy : evidence from a CGE model

Natural disasters are common in the Pacific Island countries. Fiji has been affected by many of these disasters. The most recent cyclone exerted substantial damage to infrastructure, agricultural and industrial activity in Fiji. The aim of this article is to incorporate these damages into Fiji's computable general equilibrium model and examine the short-run macroeconomic impact. Among the key results, it is found that cyclones negatively impact private income, consumption, savings, real GDP and real national welfare.

Economic impact of 2003 South Pacific Games on Fiji

Analyzes the economic impact of the 2003 South Pacific Games (SPG) hosted by the Fiji Islands. Sources of income that can be generated from the SPG events; Overview of the economic impact studies; Theoretical structure of the Fiji computable general equilibrium model.