Abstract
This paper uses a three-step Bayesian cross-entropy estimation approach in an environment of noisy and scarce data to estimate behavioral parameters for a computable general equilibrium (CGE) model and to measure how labor augmenting productivity and other structural parameters in the model may have shifted over time to contribute to the generation of historically observed changes in the economic arrangement. In this approach, the parameters in a CGE model are treated as fixed but unobserved, which we represent as prior mean values with prior error mass functions. Estimation of the parameters involves using an informationtheoretic Bayesian approach to exploit additional information in the form of new data from a series of Social Accounting Matrices (SAMs), which we assume were measured with error. The estimation procedure is "efficient" in the sense that it uses all available information and makes no assumptions about unavailable information. As illustration, we apply the methodology to estimate the parameters of a CGE model using alternative data sets for South Korea and for Sub-Saharan Africa.
Highlights
Computable general equilibrium (CGE) models are often criticized for weak empirical estimation of the parameters and for preserving static economic structures in long-term simulations
The cross-entropy estimation method is technically compatible with any CGE model
Since the specifications of the standard IFPRI CGE model are well documented, we only briefly sketch its outline to emphasize the key unobserved parameters of behavioral relationships for estimation. figure 1 of appendix 4 depicts the general structure of the production and consumption sides in the model, respectively
Summary
CGE models are often criticized for weak empirical estimation of the parameters and for preserving static economic structures in long-term simulations. The problem is associated with the lack of reliable time-series data, most severe in developing countries, to support standard econometric estimation of parameters and shifts in structure. We have lacked a times series of social accounting matrices (SAMs) and their associated prices and quantities that provide the information base for these models. There are examples of econometric estimation of parts of the CGE model where some time series data are available—see Jorgenson and Yun (2013) and other work by Jorgenson and various coauthors
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