Computable General Equilibrium Simulation Research Articles

Devolved fiscal powers, increased competitiveness and ‘levelling up’: a simulation approach

ABSTRACT The UK levelling up agenda includes a commitment to devolution, but there has been little attempt to model the operation of possible accompanying regional tax powers. We use computable general equilibrium simulations to analyse the local impacts of regional tax cuts. These reduce production costs, thereby stimulating regional economic activity. But the financing of any subsequent deficit and the operation of the regional labour market determines the size, nature and dynamics of resulting economic outcomes. Further, the decision to target labour or capital costs has implications for a range of regional economic impacts.

Implication of Renewable Heat Policy on Reducing Carbon Emissions in China: A Dynamic CGE Simulation

In 2020, China pledged to achieve carbon emission peaking before 2030 and carbon emission neutrality before 2060. Renewable heat is a key solution for decarbonizing the heating sector, which is responsible for more than 40% of global CO2 emissions. Policy interventions are necessary for scaling up renewable heat deployment due to both economic and non-economic barriers faced, while the instrument selection should be taken into account carefully. Thus, a dynamic computable general equilibrium (CGE) model was built to evaluate and compare the effects with different renewable heat policy shocks. The scenario analysis method is applied to compare two types of policies relative to baseline scenarios, subsidy, and energy tax. The findings indicate that: first, both subsidy and energy tax have positive effects on CO2 emission reductions while economic factors should also be accounted for. Secondly, the selection of subsidy and energy tax should seek a balance between economic factors and environmental factors as they may also affect economic growth or sectoral output to some degree. The energy tax rate should be moderate to avoid high economic impact. Thirdly, energy tax levying in the medium-long term has a beneficial impact on GHG emissions, while the instruments should be adopted with a careful rate chosen to avoid unnecessary tax burden on sectors that impede the orderly transition of relevant industries. Fourthly, it's reasonable to set a relatively high subsidy rate in the initial stage and gradually reduce the intensity of the renewable heating subsidy rate. For the energy tax rate, it is necessary to connect with the carbon trading market to set a relatively reasonable rate-setting mechanism to meet the dynamic needs of different stages.

Collateral damage? Welfare effects of the Ukraine war on Pakistan

The 2022 Ukraine conflict has contributed to a major spike in international commodity prices. In this study, we conduct a top-down, macro-micro simulation analysis by combining Computable General Equilibrium simulations with data from the 2018–19 Pakistan Household Integrated Economic Survey to analyze the impact of global price shock to four major commodities, namely wheat, vegetable oil, petroleum, and fertilizers. We come up with evidence for a significant, non-negligible negative impact of the price shock, both at the aggregate and the household level: Real GDP shrinks and real household consumption and income decrease. The drop in consumption and income is more visible among farm households, with the two falling by 5% and 3.48% respectively. The consumption and income of the above-median income households fall more steeply, and income inequality decreases. The USD3.2 headcount poverty rate at the 2018 purchasing power parity increases by 1.15%. Urban households show the worst decline in food security, both in incidence and intensity. The role of petrol prices in driving poverty among rural farm households and that of food stuff (wheat and vegetable oil prices) in aggravating urban food security is particularly evident. These findings highlight the poverty and food security-worsening dimension of the Russo-Ukrainian conflict.

Dynamic computable general equilibrium simulation of agricultural greenhouse gas emissions in China

Climate change is an urgent global issue, and the agricultural sector is one of the main contributors to greenhouse gas (GHG) emissions. In order to accurately analyze agricultural GHG emissions, this study constructed a dynamic computable general equilibrium model of Chinese agriculture. We aimed to examine the trends and structure of agricultural GHG emissions, and grain production in China. Results show that (i) China's agricultural CO2 emissions will increase from 47.77 MtC in 2008 to 239.99 MtC in 2050. The input of agricultural materials is the primary source for this rise. (ii) Non-CO2 GHG emissions contribute the most to agricultural GHG, which will reach 2214.55 MtC in 2050. (iii) The total agricultural GHG emissions in China will maintain an overall upward trend from 2008 to 2050, increasing from 220 MtC in 2008–2413.64 MtC in 2050 with an average annual growth rate of 5.87%. (iv) GHG emissions from grain production will reach 919.09 MtC by the year 2050. GHG emissions per grain production and emissions per area will increase to 343.81 kgC/t, and 4.46 tC/ha by the year of 2050, respectively. These findings carry several policy implications to China's agriculture low-carbon development, such as improve the agricultural materials utilization efficiency, optimize manure management and treatment, and promote organic planting technology.

Economic Impacts of Public Air Transport Investment: A Case Study of Egypt

This paper applies an input–output (I-O) approach and a dynamic computable general equilibrium (CGE) model to examine the economy-wide short- and long-run impacts of an increase in public capital investment in air transport infrastructure. The results of the I-O analysis reveal that air transport has above-average backward linkages with other sectors in the economy, with mining being the most intensive industry in intermediate input demand for air transport. The results of the CGE simulation show that at the macroeconomic level, expanding public air transport stock induces modest growth in GDP, employment, income, consumption, private investment, and trade. The findings show that the estimated impact of air transport investment is lower than estimated in studies on the “multiplier effect” of the investment using partial equilibrium techniques.

Inter-metropolitan regional migration galvanized by high-speed rail: A simulation analysis of the Linear Chuo Shinkansen line in Japan

The development of transportation infrastructure impacts migration, production, and other economic activities along with it. In this study, we conducted a multiregional computable general equilibrium simulation analysis to assess the effects that the proposed 2027 high-speed railway, the Linear Chuo Shinkansen in Japan, will have on population migration. The 47 prefectures ordained by the Japanese administrative unit were considered, and the simulation potential workforce population was taken as 110 million. The population is concentrated in the Tokyo metropolitan area. As per our simulation, once the proposed high-speed railway opens, “travel costs” (comprising time and the monetary costs of traveling) will decrease. This situation will stimulate economic activities and lead people to migrate to the prefectures where the economic environment improves. The results show that this development will ease extreme population concentration while simultaneously increasing employment and production values. However, additional analysis indicates that further development of the Linear Shinkansen to strengthen the current high-speed rail on the route to Tokaido will increase population concentration.

Covid-19 і G-подібне відновлення: нова форма відновлення економіки

The uneven recovery in the world economy since the start of Covid-19 wreaking havoc in 2020 has given us a new shape in economic development: the K-shape. As an alternative to the K-shape, we found the possibility of an even worse development: the G-shape. Indonesia, which experienced the deceleration of its economic growth in the pre-pandemic period, can struggle with a G-shaped recovery. This paper evaluates this possibility by comparing the country to other emerging economies. This study uses 10 economic performance indicators to determine the possibility of a G-shaped recovery in an economy, which represent the demand side, supply side, monetary policy, fiscal policy, health and institutional quality (credit, labor, Total Factor of Productivity, Human Development Index, regulatory quality, CA balance to GDP, current health expenditure, internet bandwidth, debt to GDP, and economic openness). The research sample covers 33 countries. Among them, 7 countries with the highest possibility of G-Shaped economic development were identified: Pakistan, Mexico, Egypt, South Africa, Nigeria, Indonesia, and Brazil. Several counties in samples, including Pakistan, Mexico, Egypt, South Africa, Nigeria, Indonesia, and Brazil, are trapped in long stagnation. The regression result shows a positive relationship between each dependent variable and the GDP, except for economic openness. From the results, the Human Development Index has the highest coefficient among the other independent variables. This paper also employed the Computable General Equilibrium simulation analysis model to project Indonesian economic growth, which shows Indonesia's possibility of being trapped in the G-shaped recovery.

A computable general equilibrium analysis of environmental tax reform in Japan with a forward-looking dynamic model

The Japanese government plans to reduce greenhouse gas emissions by 80% by 2050. However, it is not yet clear which policy measures the government will adopt to achieve this goal. In this regard, environmental tax reform, which is the combination of carbon regulation and the reduction of existing distortionary taxes, has attracted much attention. This paper examines the effects of an environmental tax reform in Japan. Using a dynamic computable general equilibrium (CGE) model, we analyze the quantitative impacts of an environmental tax reform and clarify which types of environmental tax reform are the most desirable. In the simulation, we introduce a carbon tax and consider the following four scenarios for the use of the carbon tax revenue: (1) a lump-sum rebate to the household, (2) a cut in income taxes, (3) a cut in corporate taxes and (4) a cut in consumption taxes. The first scenario is a pure carbon tax, and the other three scenarios are types of environmental tax reform. Our CGE simulation shows that (1) environmental tax reform tends to generate more desirable impacts than the pure carbon tax and that (2) the strong double dividend is obtained in some cases. In particular, we show that a cut in corporate taxes leads to the most desirable policy in terms of GDP and national income.

Are CGE models reliable for disaster impact analyses?

ABSTRACT This study investigates a fundamental issue of computable general equilibrium (CGE) modeling: are CGE models reliable for measuring the economic consequence analysis of disasters? We assess the outputs of CGE analyses after controlling for various modeling factors such as data, type of model, and modeling mechanisms via a meta-analysis of 253 CGE simulations in 57 empirical studies. Our study arrives at three major findings. First, we confirm that resilience significantly reduces business disruptions from disasters. Second, results using either real-world or hypothetical data tend to vary substantially by hazard type. Third, results are quite sensitive to model assumptions and modeling structure. Overall, we suggest that future impact assessments of disasters should be conducted more cautiously in terms of adopting appropriate data, models, and shock scenarios, in order to improve the validity of CGE modeling outcomes.

A Computable General Equilibrium Analysis of Environmental Tax Reform in Japan

The Japanese government plans to reduce greenhouse gas emissions by 80% by 2050. However, it is not yet clear which policy measures the government will adopt to achieve this goal. In this regard, environmental tax reform, which is the combination of carbon regulation and the reduction of existing distortionary taxes, has attracted much attention. This paper examines the effects of environmental tax reform in Japan. Using a dynamic computable general equilibrium (CGE) model, we analyze the quantitative impacts of environmental tax reform and clarify which types of environmental tax reform are the most desirable. In the simulation, we introduce a carbon tax and consider the following five scenarios for the use of carbon tax revenue: 1) a lump-sum rebate to the household, 2) a cut in social security contributions, 3) a cut in income taxes, 4) a cut in corporate taxes and 5) a cut in consumption taxes. The first scenario is a pure carbon tax, and the other four scenarios are types of environmental tax reform. Our CGE simulation shows that environmental tax reform tends to generate more desirable impacts than the pure carbon tax by improving welfare or increasing GDP while reducing emissions (double dividend). In particular, we show that a cut in corporate taxes leads to the most desirable policy in terms of GDP and national income.

Land redistribution and the South African economy

Land redistributive policies can be viewed as effective tools for reducing rural poverty mainly because agriculture continues to be a major source of rural livelihood and a contributor to rural economic growth. For the structural changes and economy-wide impacts, including behavioural changes of rural land distribution, to be assessed and captured through time, a South African Social Accounting Matrix can be used as a database to construct a dynamic computable general equilibrium simulation model to simulate the potential impact on household welfare in South Africa. This study seeks to assess how government redistributive policies may affect household welfare in short- and long-run, focusing on poverty and income distribution in South Africa by applying a dynamic computable general equilibrium microsimulation model. The results showed that rural land distribution increases poor household income through an increase in factor by an average of 0.828. However, for most macroeconomic variables, the impact is negative in the short-run with a gradual increase in the long-run. The results support the claim that rural land distribution coupled with agriculture investment and government support can be effective in improving household welfare.

Output and input bias effects of U.S. direct payments

AbstractThis study examines the national effect of U.S. direct payments on the extent and direction of biased technical change on U.S. agriculture. We also assess the economic significance of the estimated bias effects for economic policy modeling endeavors involving a reduction of domestic support payments. A two outputs (livestock and crops) and four inputs (labor, capital, land, and material) translog cost function was estimated from national time series (1948–2011) data. Results indicate that payments do not induce output‐biased technical change. We do find evidence of Hicksian bias that is land using and material input saving attributable to support payments. Global computable general equilibrium simulations suggest that price and output effects of discontinuing direct payments are 1/4 to 1/3 the size once the bias effects are incorporated.

The consequences of Brexit for Africa: The case of the East African Community

How will Brexit impact on Africa? This paper looks at the available empirical evidence and carries out a Computable General Equilibrium simulation, focusing particularly on the prospects for the East African Community (EAC). The paper makes three main points. First, while the direct impacts through investment, trade and remittances are likely to be relatively small, African countries may benefit from the creation of new export opportunities. However, these are mainly in resource-intensive sectors that are not considered a priority for the development agendas of most African countries. Second, indirect consequences, through Brexit's impact on the global economy, its influence on the Economic Partnership Agreements (EPAs) with the European Union, or a potential reduction in UK development cooperation, are likely to be equally important over the longer run. Finally, one overlooked consequence of Brexit for Africa is that it could undermine confidence in ‘deep’ regional integration processes like the EAC. The paper concludes that the correct response at such a time is not to falter but to redouble efforts towards regional integration through the implementation of the recently-signed African Continental Free Trade Area, while learning the pertinent lessons from Europe.

Can Private Vehicle-augmenting Technical Progress Reduce Household and Total Fuel Use?

This paper demonstrates the importance of modelling energy-intensive household services in general, and private transportation in particular, as combinations of energy and other inputs. Initially a partial equilibrium approach is used to analyse private transport consumption as a self-produced commodity formed by household vehicle and fuel use. We particularly focus on the impact of private vehicle-augmenting technical progress in this framework. We show that household fuel use will fall if it is easier to substitute between vehicles and fuel in the household production of private transport services than it is to substitute between private transport and the composite of all other goods in overall household consumption. The analysis is then extended, through Computable General Equilibrium simulation, to investigate the wider implications of similar efficiency improvements when intermediate demand, prices and nominal income are endogenous. The subsequent reduction in the price of private transport service (not observable in market prices) allows the wage measured relative to the CPI to rise whilst the wage relative to the price of foreign goods falls. This simultaneously increases UK international competitiveness, encouraging increased exports and reduced import penetration whilst allowing employment to rise. This provides an additional supply-side stimulus to production, employment and household income.

Modeling the Impacts of Free Trade Agreements on Domestic Transportation Gateways, Corridors, and Ports

Canada has recently made progress with several free trade agreements (FTAs), and although the government has carried out considerable analysis of their potential impact on the Canadian economy, little to no work has been done to assess the potential impact on Canada's transportation system. The objective of the research was to estimate the impacts of recent and forthcoming FTAs on Canada's domestic trade infrastructure. This study extended a typical computable general equilibrium simulation of an FTA by estimating high-level domestic supply chain characteristics (i.e., subnational region of origin or destination, sub-national region of exit or entry, international transportation mode, port of clearance) and by converting the resulting trade flows to freight flows measured in tonnage. The results indicate that the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union (EU) may have had large impacts on Canada's Continental and Atlantic Gateways, especially at the Port of Montreal, Quebec, as a result of trade creation with the EU. CETA also has had impacts on various crossings at the U.S. border as a result of trade diversion with the United States. Simulations, however, suggested that the Canada–Korea Free Trade Agreement has had relatively small impacts, mostly concentrated in the Asia-Pacific Gateway, particularly at the Port of Vancouver, British Columbia. Although the impacts were FTA-specific, this research demonstrated the need to consider FTAs in commodity forecasting and freight transportation planning, because they could make sizable changes to future freight flows on domestic transportation infrastructure.

A dynamic computable general equilibrium simulation of China’s innovation-based economy under the new normal

Researching China’s innovative economic and financial innovation issues under the background of the New Normal, we need to carefully analyze the internal structure and interaction of China’s macroeconomics. The computable general equilibrium (CGE) model has outstanding advantages on predicting the external shock influences on economic system, but previous studies on forecast for China’s future economy mostly considered a high growth rate which is hard to comply with the New Normal scene. By constructing China’s macroeconomic dynamic CGE (DCGE) model and anticipating the economic impact of the New Normal, this paper finds that the New Normal has a certain extent inhibition on China’s macro-economy and innovation. However, after adding the research and development (R&D) subsidy policy, the negative impacts of the New Normal on macro-economy can be eliminated to realize the optimization of economic structure. In addition, after combining the financial innovation promoting policy and the KeQiang index through the simulation of macro-economy, we find that the quality of economic growth is improved. Finally, we provide the policy recommendations for the realization of an innovative economy under China’s New Normal.

The effects of household consumption pattern on regional development: A case study of Shanghai

With the rapid economic development and urbanization, household consumption has played an important role in energy consumption and carbon emissions. This study selects the front-runner developed city Shanghai as a case study to investigate the effects of household consumption pattern on its energy consumption and carbon emissions by employing a CGE (Computable General Equilibrium) model. The results show that Shanghai's historical carbon emissions related to household consumption present an increasing trend for years of 2002, 2005 and 2007. Moreover, the indirect carbon emissions from household consumption are higher than the direct emissions. The CGE simulation shows that the household consumption, energy consumption, carbon emissions, output of industry, Shanghai's foreign trade would continue to increase until 2030, and the low-carbon oriented household consumption would save 65 million ton of coal equivalent (or 39%) energy and 39.4 million ton (or 40%) of carbon emissions compared to the high-carbon scenario. Furthermore, due to the pattern change of household consumption, resource patterns embedded in Shanghai's foreign trade would present net import in the future.

The Economic Significance of Hunting Tourism in East Lapland, Finland

ABSTRACTUses of game resources are under constant debate. One such debate focuses on hunting tourism and its contributions to rural economics. To prioritize future investment and inform policy decisions, it is necessary to identify the full economic consequences of the operation of hunting tourism companies in rural areas. However, the true economic significance of these typically small-scale companies is not apparent when examined on an industrial scale. These companies may nevertheless serve as a sustainable solution to local-scale rural challenges. In this article, the regional economic significance of hunting tourism is estimated for the East Lapland sub-region of northern Finland through the use of Computable General Equilibrium simulation models. Although these models are known to effectively evaluate short- and long-term regional economic effects of industries such as tourism, they have not previously been applied to evaluate hunting tourism.

Economic implications of climate change impacts on human health through undernourishment

This study quantified the impacts of climate change on human health through undernourishment using two economic measures. First, changes in morbidity and mortality due to nine diseases caused by being underweight as a child were analyzed using a Computable General Equilibrium (CGE) model with changes in the labor force, population, and demands for healthcare taken into consideration. Second, changes in mortality were taken from the CGE simulation and assessed economically by the value of lives lost and willingness to pay to reduce the risk. Model uncertainties in future crop yields and climate conditions were considered using future projections from six global crop models and five global climate models. We found that the economic valuation of healthy lives lost due to undernourishment under climate change was equivalent to −0.4 % to 0.0 % of global gross domestic product (GDP) and was regionally heterogeneous, ranging from −4.0 % to 0.0 % of regional GDP in 2100. In contrast, the actual economic losses associated with the effects of additional health expenditure and the decrease in the labor force due to undernourishment resulting from climate change corresponded to a − 0.1 % to 0.0 % change in GDP and a − 0.2 % to 0.0 % change in household consumption, respectively, at the global level.

Intensive margin of land use in CGE models – Reviving CRESH functional form

In this study I suggest that computable general equilibrium (CGE) studies of land use change could benefit from more careful modeling of the intensive margin. That requires more attention placed on the production function.I support my claim with empirical estimation and corresponding CGE simulations. The empirical data is a farm enterprise panel of Finnish farms for years 2004–2009. I run two short run test simulations with the ORANI-G model: (1) land productivity improvement, and (2) decrease in agricultural subsidies.The empirical results favor the CRESH functional form over the prevailing Cobb–Douglas and CES forms. The CGE simulations show that the results are sensitive to the functional form choice. CRESH portrays weaker changes in land use in the first simulation than its alternatives. In the second simulation CRESH portrayed more land use adjustment than the CES alternatives. Cobb–Douglas was clearly the worst alternative in the empirical part and showed more diverging results in the simulation results as well. Accordingly, an inadequate treatment of intensive margin in land use CGE models might yield misleading conclusions and faulty policy recommendations.