The VATTAGE Regional Model VERM - A Dynamic, Regional, Applied General Equilibrium Model of the Finnish Economy

Abstract

Applied general equilibrium models have become a standard tool for the analysis of structural policies in many countries and international research organisations. Their use has been prompted by both developments in economics, but also on the growing need for quantitative policy analysis. The analysis of actual policy options mandates the use of numerical methods, but there are several other reasons to suggest the use of AGE models in particular. Chief among these is the applicability of models that rely on explicit optimisation on the analysis of welfare impacts of structural policies. It may also be the case that many policy issues are intractable by theoretical models, for example, when the policies concern several sectors or regions of the economy, or involve contradicting effects. This report describes the VERM model used in VATT, the Government Institute for Economic Research. The model has been used to study the effects of various tax policies, regional policies, and environmental policies on the economy. Lately, the model has seen extensive use in the anticipation of regional development, especially in the labour markets. The report contains a full description of the model code and its underlying theory. With the help of examples, it also shows how simulation results can be interpreted.