Macroclosures in Open Economy Cge Models: a Numerical Reappraisal

It Has Been Argued That in the Construction and Simulation Process of Computable General Equilibrium (Cge) Models, the Choice of the Proper Macroclosure Remains a Fundamental Problem. in This Study, with a Standard Cge Model, We Simulate Disturbances Stemming From the Supply Or Demand Side of the Economy, Under Alternative Macroclosures. According to Our Results, the Choice of a Particular Closure Rule, for a Given Disturbance, May Have Different Quantitative and Qualitative Impacts. This Seems to Confirm the Imiportance of Simulating Cge Models Under Alternative Closure Rules and Eventually Choosing the Closure Which Best Applies to the Economy Under Study.

Are CGE Models still useful in economic policy making?

This paper develops background considerations to help better framing the results of a CGE exercise. Three main criticisms are usually addressed to CGE efforts. First, they are too aggregate, their conclusions failing to shed light on relevant sectors or issues. Second, they imply huge data requirements. Timeliness is frequently jeopardised by out-dated sources, benchmarks referring to realities gone by. Finally, results are meaningless, as they answer wrong or ill-posed questions. Modelling demands end up by creating a rather artificial context, where the original questions lose content. In spite of a positive outlook on the first two, crucial questions lie in the third point. After elaborating such questions, and trying to answer some, the text argues that CGE models can come closer to reality. If their use is still scarce to give way to a fruitful symbiosis between negotiations and simulation results, they remain the only available technique providing a global, inter-related way of capturing economy-wide effects of several different policies. International organisations can play a major role supporting and encouraging improvements. They are also uniquely positioned to enhance information and data sharing, as well as putting people from various origins together, to share their experiences. A serious and complex homework is however required, to correct, at least, the most dangerous present shortcomings of the technique.

Are CGE models still useful for economic policymaking?

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Calibrating a CGE model with NTBs that Incorporates Standard Models of Modern Trade Theory

We propose a way to incorporate NTBs for the four workhorse models of the modern trade literature in computable general equilibrium models (CGEs). CGE models feature intermediate linkages and thus allow us to study global value chains (GVCs). We show that the Ethier-Krugman monopolistic competition model, the Melitz firm heterogeneity model and the Eaton and Kortum model can be defined as an Armington model with generalized marginal costs, generalized trade costs and a demand externality. As already known in the literature in both the Ethier-Krugman model and the Melitz model generalized marginal costs are a function of the amount of factor input bundles. In the Melitz model generalized marginal costs are also a function of the price of the factor input bundles. Lower factor prices raise the number of firms that can enter the market profitably (extensive margin), reducing generalized marginal costs of a representative firm. For the same reason the Melitz model features a demand externality: in a larger market more firms can enter. We implement the different models in a CGE setting with multiple sectors, intermediate linkages, non-homothetic preferences and detailed data on trade costs. We find the largest welfare effects from trade cost reductions in the Melitz model. We also employ the Melitz model to mimic changes in Non tariff Barriers (NTBs) with a fixed cost-character by analysing the effect of changes in fixed trade costs. While we work here with a model calibrated to the GTAP database, the methods developed can also be applied to CGE models based on the WIOD database.

Statistical Inference for Computable General Equilibrium Models with Application to a Model of the Moroccan Economy

We study the problem of measuring the uncertainty of CGE (or RBC)-type model simulations associated with parameter uncertainty. We describe two approaches for building confidence sets on model endogenous variables. The first one uses a standard Wald-type statistic. The second approach assumes that a confidence set (sampling or Bayesian) is available for the free parameters, from which confidence sets are derived by a projection technique. The latter has two advantages: first, confidence set validity is not affected by model nonlinearities; second, we can easily build simultaneous confidence intervals for an unlimited number of variables. We study conditions under which these confidence sets take the form of intervals and show they can be implemented using standard methods for solving CGE models. We present an application to a CGE model of the Moroccan economy to study the effects of policy-induced increases of transfers from Moroccan expatriates.

Confidence Regions for Calibrated Parameters in Computable General Equilibrium Models

We consider the problem of accessing the uncertainty of calibrated parameters in computable general equilibrium (CGE) models through the construction of confidence sets (or intervals) for these parameters. We study two different setups under which this can be done.

Trade Coefficients and the Role of Elasticity in a Spatial CGE Model Based on the Armington Assumption

The Armington Assumption in the context of multi-regional CGE models is commonly interpreted as follows: Same commodities with different origins are imperfect substitutes for each other. In this paper, a static spatial CGE model that is compatible with this assumption and explicitly considers the transport sector and regional price differentials is formulated. Trade coefficients, which are derived endogenously from the optimization behaviors of firms and households, are shown to take the form of a potential function. To investigate how the elasticity of substitutions affects equilibrium solutions, a simpler version of the model that incorporates three regions and two sectors (besides the transport sector) is introduced. Results indicate: (1) if commodities produced in different regions are perfect substitutes, regional economies will be either autarkic or completely symmetric and (2) if they are imperfect substitutes, the impact of elasticity on the price equilibrium system as well as trade coefficients will be nonlinear and sometimes very sensitive.

Factor Markets in Applied Equilibrium Models: The current state and planned extensions towards an improved presentation of factor markets in agriculture. Factor Markets Working Paper No. 23, February 2012

This paper describes how factor markets are presented in applied equilibrium models and how we plan to improve and to extend the presentation of factor markets in two specific models: MAGNET and ESIM. We do not argue that partial equilibrium models should become more ‘general’ in the sense of integrating all factor markets, but that the shift of agricultural income policies to decoupled payments linked to land in the EU necessitates the inclusion of land markets in policy-relevant modelling tools. To this end, this paper outlines options to integrate land markets in partial equilibrium models. A special feature of general equilibrium models is the inclusion of fully integrated factor markets in the system of equations to describe the functionality of a single country or a group of countries. Thus, this paper focuses on the implementation and improved representation of agricultural factor markets (land, labour and capital) in computable general equilibrium (CGE) models. This paper outlines the presentation of factor markets with an overview of currently applied CGE models and describes selected options to improve and extend the current factor market modelling in the MAGNET model, which also uses the results and empirical findings of our partners in this FP project.

Factor Markets in General Computable Equilibrium Models. Factor Markets Working Document No. 47, May 2013

One objective of Computable general equilibrium (CGE) models is the analysis of economy-wide effects of policy measures. The focus of the Factor Markets project is to analyse the functioning of factor markets for agriculture in the EU-27, including the Candidate Countries. While agricultural and food markets are fully integrated in a European single market, subject to an EU-wide common policy, the Common Agricultural Policy (CAP), this is not the case for the agricultural factor markets capital, labour and land. There are partly serious differences with regard to member state regulations and institutions affecting land, labour and capital markets. The presentation of this heterogeneity of factor markets amongst EU Member States have been implemented in the CGE models to improve model-based analyses of the CAP and other policy measures affecting agricultural production. This final report comprises the outcome of a systematic extension and improvement of the Modular Applied GeNeral Equilibrium Tool (MAGNET) model starting from an overview of the current state of the art to represent factor markets in CGE models to a description of work on labour, land and capital in MAGNET.

Using a CGE Model to Identify the Policy Trade-Off between Unemployment and Inflation: The Efficient Phillips Curve

This paper provides a new reading of a classical economic relation: the short-run Phillips curve. Our point is that, when dealing with inflation and unemployment, policy-making can be understood as a multicriteria decisionmaking problem. Hence, we use so-called multiobjective programming in connection with a computable general equilibrium (CGE) model to determine the combinations of policy instruments that provide efficient combinations of inflation and unemployment. This approach results in an alternative version of the Phillips curve labelled as efficient Phillips curve. Our aim is to present an application of CGE models to a new area of research that can be especially useful when addressing policy exercises with real data. We apply our methodological proposal within a particular regional economy, Andalusia, in the south of Spain. This tool can give some keys for policy advice and policy implementation in the fight against unemployment and inflation.

Relocation of Intensive Agriculture to Northern Australia: The Case of the Rice Industry

Development of new agricultural industries in northern Australia is seen as a way to provide food security in the face of reduced water availability in existing regions in the south. This report aims to identify some of the possible economic consequences of developing a rice industry in the Burdekin region, while there is a reduction of output in the Riverina. Annual rice production in the Riverina peaked at 1.7 M tonnes, but the long-term outlook, given climate change impacts on that region and government water buy-backs, is more likely to be less than 800,000 tonnes. Growers are highly efficient water users by international standards, but the ability to offset an anticipated reduction in water availability through further efficiency gains is limited. In recent years growers in the Riverina have diversified their farms to a greater extent and secondary production systems include beef, sheep and wheat. Production in north Queensland is in its infancy, but a potentially suitable farming system has been developed by including rice within the sugarcane system without competition and in fact contributing to the production of sugar by increasing yields and controlling weeds. The economic outcomes are estimated a large scale, dynamic, computable general equilibrium (CGE) model of the world economy (Tasman Global), scaled down to regional level. CGE models mimic the workings of the economy through a system of interdependent behavioural and accounting equations which are linked to an input-output database. When an economic shock or change is applied to a model, each of the markets adjusts according to the set of behavioural parameters which are underpinned by economic theory. In this study the model is driven by reducing production in the Riverina in accordance with relationships found between water availability and the production of rice and replacement by other crops and by increasing ride production in the Burdekin. Three scenarios were considered: • Scenario 1: Rice is grown using the fallow period between the last ratoon crop of sugarcane and the new planting. In this scenario there is no competition between rice and sugarcane • Scenario 2: Rice displaces sugarcane production • Scenario 3: Rice is grown on additional land and does not compete with sugarcane. Two time periods were used, 2030 and 2070, which are the conventional time points to consider climate change impacts. Under scenario 1, real economic output declines in the Riverina by $45 million in 2030 and by $139 million in 2070. This is only partially offset by the increased real economic output in the Burdekin of $35 million and $131 million respectively.

Cost effectiveness of a combination of instruments for global warming: a quantitative approach for Spain

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Energy Supply and the Sustainability of Endogenous Growth

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Liberalização Comercial: Um modelo de Equilíbrio Geral Computável para o Comércio entre Brasil e China

Este estudo avalia o impacto da liberalização comercial entre Brasil e China sobre o comércio, produção, preços, investimento, poupança e emprego. O objetivo da análise é identificar a existência de uma oportunidade de comércio para o Brasil que viabilize um maior crescimento, incremente as exportações brasileiras e reduza o desemprego. A hipótese principal é a existência de ganhos de bem estar no comércio com a China. O modelo utilizado é o GLOBAL TRADE ANALYSIS PROJECT (GTAP) com 10 regiões, 10 produtos, 5 fatores, com retornos constantes de escala e competição perfeita nas atividades de produção. Destacam-se na análise os produtos agropecuários. Utilizam-se três fechamentos macroeconômicos (closure) para avaliar separadamente alguns agregados: a configuração padrão dos modelos CGE (preço da poupança endógeno e pleno emprego); preço da poupança exógeno; e desemprego. Conclui-se que pode haver benefícios para os dois países com o acordo.

Is China a Northern Partner to Mercosul?

We contrast Free Trade Areas involving Mercosul and the EU25, the US and China, respectively, using a new CGE model and associated database. Roughly, the China FTA lies halfway the other two, a bias towards the US pattern being suggested. When considering China a new Northern partner, protective deals don’t seem advisable. China’s advantages should prevail when facing the US or the EU: its need of capital goods, for instance, may open profitable cross-exchanges. China’s emergence can be a positive factor, if placed in an enlarged policy space where, together with its Asian neighbours, it counter-balances the US-EU polarity.