Applied General Equilibrium Model Research Articles

Identifying key sectors of sustainable development: A Bayesian framework estimating policy‐impacts in a general equilibrium

AbstractTransformation of the previous centrally growth‐oriented economic systems to a sustainable bio‐economy is a global political trend, where public policy is a key factor in making this successful. Designing effective and efficient policies requires understanding the linkages between policy choices and outcomes. Most existing studies are missing a direct link to policy choices and ignore fundamental model uncertainty present in policy analysis. We empirically estimate a sector‐specific, nested two‐stage policy impact function to address these shortcomings. We apply a Bayesian estimation approach that combines existing statistical data with a priori information from political experts, thus reducing data and estimation problems. This is linked with a Computable General Equilibrium to model the entire link from policies to outcomes. We derive a theoretical framework that allows the definition of indicators for key sectors of an efficient Pro‐Poor‐Growth strategy. In our generalized framework, we show that indicators based only on growth‐poverty linkages might be misleading. To deal with model uncertainty inherent in the application, we derive a set of metamodels via simulations conducted under different model parameter settings and apply Markov Chain Monte Carlo sampling. Applying Bayesian model selection allows drawing statistical inferences on competing models to generate relatively robust policy‐relevant messages even under model uncertainty. The approach is empirically applied to Ghana, Senegal, and Uganda, analyzing the allocation of public spending on agriculture under the Comprehensive Africa Agriculture Development Programme. [EconLit Citations: C11—Bayesian Analysis: General; C63—Computational Techniques, Simulation Modeling; D58—Computable and Other Applied General Equilibrium Models; O55—Africa; Q01—Sustainable Development; Q18—Agricultural Policy].

Exploiting Complementarity in Applied General-Equilibrium Models: Heterogeneous Firms, Multinationals, Capacity Constraints, Endogenous Zeros

Exploiting Complementarity in Applied General-Equilibrium Models: Heterogeneous Firms, Multinationals, Capacity Constraints, Endogenous Zeros

Exploiting Complementarity in Applied General-Equilibrium Models: Heterogeneous Firms, Multinationals, Capacity Constraints, Endogenous Zeros

Exploiting Complementarity in Applied General-Equilibrium Models: Heterogeneous Firms, Multinationals, Capacity Constraints, Endogenous Zeros

Economic incentives modify agricultural impacts of nuclear war

A nuclear war using less than 1% of the current global nuclear arsenal, which would inject 5 Tg of soot into the stratosphere, could produce climate change unprecedented in recorded human history and significant impacts on agricultural productivity and the economy. These effects would be most severe for the first five years after the nuclear war and may last for more than a decade. This paper calculates how food availability would change by employing the Environmental Impact and Sustainability Applied General Equilibrium model. Under a robust world trading system, global food availability would drop by a few percentage points. If the war would destabilize trade, it would magnify by several times the negative ramifications of land productivity shocks on food availability. If exporting countries redirect production to domestic consumption at the expense of importing countries, it would lead to the destabilization of international trade. The analysis suggests that economic models aiming to inform policymakers require both economic behavior analysis and biophysical drivers. Policy lessons derived from a crop model can be significantly nuanced when coupled with economic feedback derived from economic models. Through the impact on yield, farmers could shift production among crops and reallocate land use to maximize profits, showing the importance of general equilibrium effects such as product and input substitution and international trade. Although the global impact on corn and soybean production would be significant when just considering crop production, it could be considerably smaller under the economic model. However, this would be at the expense of other sectors, including livestock. In addition, the costs borne from disruptions to climate would vary significantly across regions, with significant adverse effects in high latitude regions. The severity of the shocks in the high-latitude areas would marginalize the farmers’ product and input substitution ability.

Modeling long-term impacts of the COVID-19 pandemic and oil price declines on Gulf oil economies

The COVID-19 pandemic has been detrimental on hydrocarbon-overdependent Gulf states. The effects of the unprecedented oil price declines and substantial COVID-relief packages on Gulf economies are critical, as they can become enduring and foundational if the energy transitions accelerate to meet the Paris Agreement targets. Thus, this study assesses the impacts of the pandemic on the long-term economic sustainability of Gulf economies, using illustrations from Kuwait using the economy-wide WAFRA Applied General Equilibrium (WAFRAGE) Model applied to Kuwait (WAFRAGE-KWT Model). The simulation results indicate that post-pandemic, the economic resiliency of these states has significantly waned, primarily because the pandemic hit during a state of weakened economic resilience following the 2014 oil price collapse and subsequent government response. Although COVID-relief packages appeared in the form of counter-cyclical fiscal policy, Gulf states are unable to realize this policy's full potential benefits. They are incapable of being truly counter-cyclical under their current economic structure and the consumption-based nature of the COVID-relief packages, which protect oligopolistic firms' profits and reduce production, non-oil exports, and economic efficiency. The eroded fiscal and economic resiliency also threatens Gulf states' ability to weather energy transitions. The implication of the findings is that long-term sustainability requires immediate phased implementation of economic and energy reforms.

ANALISIS KEBIJAKAN FISKAL DAN IMPLIKASINYA KEPADA PEREKONOMIAN INDONESIA: ANALISIS KESEIMBANGAN UMUM

The economy cannot be separated from the role of government spending in stimulating the economy. Fiscal policy is government’s tool to intervene in theeconomy, could change for the better economy or even make the economy into a recession. On the other hand, economic activity over the impact of greenhouse gas contribution, so the impact on global climate change. Therefore, a certain sectorspecific fiscal policies have considerable impact in influencing greenhouse gases. This study aims to provide an analysis of fiscal policy scenarios that can affect greenhouse gases, so that could explain what sector-specific fiscal policies that can increase the risk of climate change. This research uses the model of Computable General Equilibrium (CGE) based fiscal policy held by the Ministry of Finance of the Republic of Indonesia named AGEFIS (Applied General Equilibrium Model for Fiscal). The scenario is to decrease fosil fuel subsidy that can produce CO2 emision. The results shows that decreasing fossil fuel subsidies can reduce the CO2 emission, but with high consequences. The consequences are the economic growth seen to fall, household wealth declined and the real consumption levels decrease.

CLIMATE CHANGE ADAPTATION AND ITS EFFECTS ON THE ECONOMY OF THE RURAL MEXICAN HOUSEHOLD FOOD PRODUCERS

This article analyzes the possible impacts of the climate change (CC) and its adaptation measures on the maize trade surplus/deficit, on the production, and on the real income of households established in rural Mexico. The analysis is based on an Applied and Microeconomic General Equilibrium Model and on the estimates of the direct effects of CC on maize yields obtained from the related literature. The results show that climate change will reduce the real rural income by 6.23% and will affect corn production to the extent that the area will change from being a surplus to a deficit. In addition, it is found that while the adaptation measures analyzed in the paper will help to reduce the negative effects of the phenomenon, they will not completely eliminate them.

SAM and AGEM of Mexico and Taxes on Hydrocarbons Extraction

In this article we build a SAM for Mexico (2008) and design an Applied General Equilibrium Model, both of which can be applied to other research. We use them to analyze taxes on hydrocarbons extraction, given their importance for public budget and recent energy reforms. An increase in Households Income Taxes is simulated while those taxes decrease: results show that the former would have to triple to compensate for the later, and that the first four deciles would benefit with a positive equivalent variation (given progressive Income tax), but deciles V to X would suffer a severe loss that outweighs by far the gain in low income deciles.

Quantitative Trade Models: Developments and Challenges

Applied general equilibrium (AGE) models, which feature multiple countries, multiple industries, and input–output linkages across industries, have been the dominant tool for evaluating the impact of trade reforms since the 1980s. We review how these models are used to perform policy analysis and document their shortcomings in predicting the industry-level effects of past trade reforms. We argue that, to improve their performance, AGE models need to incorporate product-level data on bilateral trade relations by industry and better model how trade reforms lower bilateral trade costs. We use the least-traded-products methodology of Kehoe et al. (2015) to provide guidance on how improvements can be made. We provide further suggestions on how AGE models can incorporate recent advances in quantitative trade theory to improve their predictive ability and better quantify the gains from trade liberalization.

Towards a circular economy: insights based on the development of the global ENGAGE-materials model and evidence for the iron and steel industry

A number of recent economic modelling studies have attempted to analyse resource efficiency and the circular economy. However, modelling analysis in this area is relatively underdeveloped. In particular, many CGE models are unable to provide significant insight given their aggregated sectoral coverage. Here we describe the development of the Environmental Global Applied General Equilibrium (ENGAGE-materials) model created to consider the economic and sectoral effects of potential policies on a circular economy and resource efficiency, which affect materials and resources at the stages of extraction, production and recycling. Our policy scope is global with a special emphasis on China and Europe, as both regions have dedicated policies in place and indicate their willingness to take the lead. The case of steel is relevant as it is a key material for all economies across the world and offers a range of interesting features for circularity and sustainability. ENGAGE-materials models iron ore mining, primary production of iron and steel, secondary production of iron and steel, and steel scrap recycling at the global level. We utilise this technology rich framework to provide preliminary results on scenarios comprising economic insights into a saturation effect and straightforward policy such as doubling the availability of secondary steel.

Optimal Regional Trade-Integration Schemes in North Africa: Toward a Pro-Industrialization Policy

This article examines the status of industrial production in North African Countries as well as the role that regional trade integration through free-trade agreements and trade facilitation may play in spurring this region’s reindustrialization. The study uses Applied General Equilibrium model to assess the potential impact of the establishment of a Continental Free Trade Area as well as the reduction of costs to trade across borders. This article also measures the additional impact of the implementation of the Great Arab Free Trade Area and, finally, a deeper free trade agreement among North African countries and the European Union. The main findings indicate that each free-trade agreement configuration will stimulate, in relative terms, North African countries’ exports from a number of main industries. Whereas industrial products represent the largest share of North African countries’ export gains to Africa in general, mining and energy dominate North African countries’ export gains to the rest of the Arab League and food dominates the exports to the European Union. Therefore, the establishment of the Continental Free Trade Area, accompanied by trade-facilitation measures, appears to be crucial in providing support for North African countries’ industrialization.

Impacts of Immigration on an Ageing Welfare State: An Applied General Equilibrium Model for France

AbstractImmigration is often seen as an instrument of adaptation for ageing countries. In this paper, we evaluate, using a dynamic general equilibrium model, the contribution of migration policy in reducing the tax burden associated with the ageing population in France. Four alternative scenarios, compared with a baseline scenario based on official projections, are simulated with the aim of quantifying the effects of immigration on French social protection finances. We show that the age and, to a lesser extent, the skill structure of immigrants are the key features that mainly determine the effects on social protection finances. Overall, these effects are all the more positive in the short to medium term if the migration policy is selective (in favour of more skilled workers). In the long term, the beneficial effects of a selective policy may disappear. But whatever the degree of selectivity of the migration policy, the financial gains from higher consequent migration flows are relatively moderate compared with the demographic changes implied by ageing.

Water Markets: Insights from an Applied General Equilibrium Model for Extremadura, Spain

In Extremadura, a southwest region of Spain, water has been traditionally been seen as an abundant resource, but growing irrigation demands under a low price of about 0.01€/m3 are outstripping the supply of raw water and competing with its other consumptive and non-consumptive uses. To deal with the water scarcity in the region, a water market can be established to achieve the highest value of water use, which may allocate irrigation water to the most efficient users. Hence, a Social Accounting Matrix and Water Accounts (SAMWA) for 2005 is used as a central core to calibrate an Applied General Equilibrium (AGE) model. This model is formulated in the Negishi format which, as a welfare program, can price raw water by its marginal value. The main purpose of this paper is to obtain insights into the potential economy-wide gains from establishing a water market such that this resource is allocated efficiently. The impact of a water market policy is investigated under three scenarios. First, we simulate a decrease in the availability of raw water in Extremadura due to climate change. Second, an investment in a more efficient irrigation technology is considered. Finally, we extend our AGE model by including the amenity services of water and investigate how the willingness to pay of consumers would affect the efficient water allocation. We thus offer policy makers insights into how regional policies could be designed under different circumstances for a better management of raw water in Extremadura.

A simulation of impact of withdrawal European funds on Andalusian economy using a dynamic CGE model: 2014–20

This is the first time that European Regional Policy will not consider Andalusia as one of the Objective 1 priority areas. Thus, this paper analyzes the economic impact of the withdrawal of a large amount of European Structural Funds from the Andalusian economy in the 2014–2020 Community Support Framework. A Dynamic Applied General Equilibrium Model is developed to assess the effects of the loss of this funding on the main regional economic indicators and under different simulation scenarios. The model analyzes the effect of economic policy actions on the economy, satisfying the requirements of welfare and technological feasibility when given some restrictions on available resources.

Future of European funds in a regional economy: Andalusia 2014–2020

Since the adhesion of Spain to the European Union, Andalusia has been catalogued as an Objective 1 region because its GDP was inferior to 75% of the community average. In this way, funds have contributed to the generation of regional GDP and reduced unemployment during these years, causing that levels exceed 75% with respect to average GDP per capita in the European Union. So, Andalusia will not be considered as one of the Objective 1 priority areas for European Regional Policy. With the changes in the region and the threat of an expected withdrawal of funds, this article proposes an analysis to explain the meaning of this withdrawal of European Funds in Andalusia in the period 2014–2020. With this aim, we develop a Dynamic Applied General Equilibrium Model that will assess the effects of the loss of this funding on the main regional economic indicators and under different simulation scenarios. The model will analyse the effect of economic policy actions on the economy, satisfying the requirements of welfare and technological feasibility when given some restrictions on available resources.

MIBRA-USP, An Interregional Applied General Equilibrium Model for the Brazilian Economy

On the external side Brazil has experienced since the beginning of the 1990’s an opening process of its economy in a world environment were there have been a wide process of block formation (European Union, Nafta, Mercosur, etc.), on the internal side the Brazilian Real Plan in 1994 has started a period o relative stabilization in the economy that after more than two decades of high inflation has finally brought it under control. The above factors seem to have contributed to structural changes in Brazilian economy. These structural changes were not equally distributed among the sectors and the regions in the Brazilian economy. As an instrument that can be used to evaluate the impact of the economic policies over the regional development in the Brazilian economy, this work presents an interregional Applied General Equilibrium (AGE) model, MIBRA-USP, constructed for the 16 most important sectors in the economy as well as for the 5 Brazilian macro-regions (North, Northeast, Central West, Southeast, and South), calibrated for the year of 1995. This model follows in the tradition of the MONASH-MRF (Multiregional Multisectoral Model of Australian Economy) constructed for the Australian economy and as such the model is solved using the GEMPACK software and their solutions are giving in growth rates. This model is a development over two other previous AGE models, in the Australian tradition, constructed for the Brazilian economy: a) the PAPA model (Guilhoto, 1995) that is a national model with a data base in 1980; and b) the B-MARIA model (Haddad, 1998), an interregional model consisting of 3 regions (North, Northeast, and Rest of the Economy) and calibrated for 1985. The simulations conducted with the MIBRA-USP model were chosen in a way to study how the regions and sectors in the Brazilian economy would react to different sets of economic policies.

Exchange Rate Versus Tariff Policies in Brazil: Results from MIBRA-USP, an Interregional Applied General Equilibrium Model of the Brazilian Economy

Since the beginning of the 1990’s Brazil has been experienced an opening process in the economy, which in turn has caused structural changes in the productive structure. In this work it is made an evaluation of the different impacts caused by changes in the exchange rate and in the tariffs over the Brazilian economy and its 5 macro regions. The study is done through the use of an interregional applied general equilibrium model, the MIBRA-USP. The results show that either a devaluation of the exchange rate or an increase in tariffs can cause a rise in the employment level as well as in the economic activity. However, there are differences between the policies, among which it is called attention for the real consumption of the families that decreases with the exchange rate devaluation and increases with higher tariffs.

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

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.

PEMAHAMAN DASAR ANALISIS MODEL COMPUTABLE GENERAL EQUILIBRIUM (CGE)

Simple paper about basic understanding of computable general equilibrium aimed to give basic understanding about CGE. It consist of history of CGE, assumption of CGE model, excess and lack of CGE model, and creation of simple CGE model for closed economy. CGE model is suitable to be used for seeing impact of new policy implementation. It is because CGE model use general equilibrium in which this theory of general equilibrium explaining about inter-relation among markets in the economy system. CGE model was introduced in 1960s known as Johansen model. Next, it is expanded into various models such as: ORANI Model, General Trade Analysis Project ( GTAP ) Model, and Applied General Equilibrium ( AGE ) Model. In Indonesia, there are CGE ORANI Model, Wayang, Indonesia-E3 and IRCGE. CGE Model is created by assumption of perfect competition. Consumer maximizes utility, producer maximizes profit, and company maximizes zero profit condition .

Disaggregate U.S. Labor Statistics for the USAGE 2.0 and GTAP Applied General Equilibrium Models

This paper documents a methodology to disaggregate by occupation the U.S. sectoral employment data within the USAGE 2.0 and GTAP applied general equilibrium (AGE) models. We utilize statistics from the U.S. Bureau of Labor Statistics and the U.S. Department of Agriculture, in particular the Occupational Employment Statistics Survey and the Census of Agriculture, to produce the following occupation-by-sector tables for 2007 and 2010 for each of the two AGE models: employment, mean annual wage, wage bill, and wage bill shares. The last table, wage bill shares, can be used to split payments to labor services in the AGE models into 22 major occupations.