Financial Computable General Equilibrium Model Research Articles

Can Green Credit Policies Accelerate the Realization of the Dual Carbon Goal in China? Examination Based on an Endogenous Financial CGE Model.

Green credit is an indispensable funding source through which China can achieve its carbon neutrality goal. This paper quantifies the influences of different green credit scales on energy structures, carbon reduction, the industrial economy, and the macroeconomy. It creates a green credit mechanism related to green technology innovation in a Chinese carbon neutrality computable general equilibrium (CGE) model and integrates energy, environmental, economic, and financial (3EF) systems. The green credit scale can influence green technology innovation and hence CO2 emissions. The results show that (1) green credit can accelerate China's achievement of its carbon neutrality goal, and the larger the green credit scale, the less time it takes to achieve goals; (2) the influence of green credit scales confers marginal decreasing effects with realistic policy considerations; (3) using a cost-benefit perspective, 60% is the most appropriate green credit scale to use to achieve dual carbon goals in China; (4) the different green credit scales have a heterogeneous impact on the industry output, and high-carbon-emission producers from nonenergy industries need to pay attention to their green credit risk. This research provides a scientific reference for the policy design of China's future green financial market development.

Assessing the economy-wide impacts of strengthened bank capital requirements in Indonesia using a financial computable general equilibrium model

ABSTRACT After the 2008 global financial crisis, authorities across the globe stressed the importance of equity capital to absorb losses. While many countries have raised bank capital adequacy requirements (CARs), the comprehensive impact assessment of this policy for emerging economies remains largely unexplored. We use a financial computable general equilibrium (FCGE) model of Indonesia called AMELIA-F to investigate the economy-wide impact of a 100 basis points increase in the CAR of Indonesian banks. Bank balance sheets contract as they move away from holding riskier assets, aiding macroeconomic stability. However, both non-housing and housing investment contract as banks pass on higher funding costs, driving long-run real GDP below baseline. As we discuss, debt-to-equity ratios for these sectors, and the economy-wide private debt to income ratio all fall, thus aiding long-run macroeconomic stability.

Economic evaluation of transportation projects based on different financing methods: at the framework of financial computable general equilibrium model

Purpose- The purpose of this study is to develop a first fully functional Turkish Financial Computable General Equilibrium (FCGE) model that analyzes the economic impacts of infrastructure investment projects under different financing options. We examine three alterantive financing methods, i.e., public financing with tax revenues and government bonds, public financing with region specific tax policy and private financing. Methodology- The study employs Financial Computable General Equilibrium (FCGE) model. The FCGE model integrates the real economy with the financial one, and traces the flows of financial and real resources among economic agents at the same time. Computable General Equilibrium (CGE) models typically are comparative static equilibrium models of interregional trade and location based in microeconomics, using utility and production functions with substitution between inputs. The transport system enters the spatial economy through the costs of transport services. Transport sub models are applied to feed CGE models with cost changes in the transport sector as a result of policy measures. Our model is composed of a multi-regional financial CGE model and a transport network model. Turkish Multi Regional Computable General Equilibrium model constitutes of 11 regions. The model includes ten producers, one regional household, one national (or central) government and the rest of the world. Findings- The model is designed to analyze the economic effects of fiscal policies such as the transportation investment expenditures and alternative financing approaches on economic growth and welfare. It is possible to estimate growth and distributional effects of each project based on the financing method once the information on the investment expenditures, the construction location and the changes in the accessibility generated by the project are injected into the FCGE model. As a first attempt, we builded a Financial Social Accounting Matrix (SAM) for Turkey that FCGE models need, containing the details of financial institutions and transaction of agents’ assets and liabilities. The model specifies the behaviours of ten different sectors, one household, a central government, and the rest of the world. The model is designed to analyze the impacts of highway development with different financing strategies. We examine three alterantive financing methods: it can (a) public financing with tax revenues and government bonds, (b) public financing with region specific tax policy or (c) private financing. Conclusion- The main contribution of this research is to develop a first fully functional FCGE model to analyze the economic impacts of the infrastructure investment projects and their financing options on growth and welfare in Turkish economy. We develop a first fully functional Turkish Financial Computable General Equilibrium (FCGE) model that analyzes the economic impacts of infrastructure investment projects under different financing options. There are a number of ways to finance highway infrastructure investment: fuel taxes, user fees, trust funds etc. This Financial CGE model is expected to assess the consistency of highway investment programs under different financing options, so the government can make a decision on an approval for the project based according to their benefits and costs on national level.

Reducing Fuel Subsidies and Financing Road Infrastructure in Indonesia: A Financial Computable General Equilibrium Model

This article analyses whether government policies that reallocate funding for fuel subsidies to investment in transport infrastructure improve economic growth and income distribution. We develop a financial computable general equilibrium model to simulate the fiscal policies that reduce fuel subsidies to finance road investment. The novelty of this article is a dynamic model that covers multiple sectors, households, economic actors, assets and labour types. We find that reallocating fuel subsidy funding to infrastructure investment positively affects economic growth but adversely affects equality. We also find that investing in infrastructure through bank loans results in better economic growth and income distribution than reallocating subsidy funding does. Lastly, we find that investing in transport infrastructure through tax revenue can improve welfare, economic growth and income distribution.

The Economy‐wide Impacts of a Rise in the Capital Adequacy Ratios of Australian Banks

Regulators are requiring banks to raise additional equity to finance their activities. The benefits are understood in terms of reducing the risks of another financial crisis. But there are potential costs, including the potential for unanticipated macroeconomic impacts as banks reduce leverage. We use a financial computable general equilibrium model, containing disaggregated treatment of financial agents, to explore the economy‐wide consequences of an increase in bank capital adequacy ratios. We find that the macroeconomic consequences are small.

Economic evaluation of transportation projects: An application of Financial Computable General Equilibrium model

We develop a Financial Computable General Equilibrium (FCGE) model that analyzes the economic impacts of infrastructure investment projects and their financing options on growth and distribution in the Indonesian economy. The FCGE model integrates the real economy with the financial one within a unified economic system, and traces the flows of financial and real resources among economic agents. The model is designed to analyze the economic effects of fiscal policies such as the transportation investment expenditures and alternative procurement approaches on economic growth and distribution among socio-economic classes, linking the investment expenditures with specific financial resources. It is possible to estimate growth and distributional effects of each project based on the financing method over the construction and the operation and maintenance periods once the information on the investment expenditures, the construction location and the changes in the accessibility generated by the project are injected into the FCGE model. The simulations on the Indonesian transportation projects reveal that the government financing with tax revenues could generate higher effects on GDP than other financing methods.

The Costs and Benefits of Financial Regulation: A Financial CGE Assessment of the Impact of a Rise in Commercial Bank Capital Adequacy Ratios

Financial regulators in Australia and overseas are requiring banks to raise additional capital. The benefits of this are understood in terms of reducing the risk of incurring the significant costs of another financial crisis. But there are potential costs from securing these benefits, in the form of unanticipated macroeconomic impacts as banks reduce leverage ratios. In this paper, we explore the economic consequences of a 100 basis point increase in commercial bank capital adequacy ratios using a financial computable general equilibrium model of the Australian economy. We find that the macroeconomic consequences of the policy are small. Our results suggest that prudential regulators can move forward to secure the financial system stability benefits that they expect from higher capital adequacy requirements, without concern that significant costs will be imposed on the wider economy in the form of macroeconomic disruption.

Comparing the Impacts of Financial Regulation in Australia and the United States via Simulation with Country-Specific Financial CGE Models

Beginning with Johansen (1960), computable general equilibrium (CGE) models have been widely applied to study the impact of a variety of economic issues of interest to policy makers. These include changes in taxes and tariffs, changes in labour force demographics and skill levels, the impact of epidemics and terrorist attacks, the impact of drought and water policy reform, and the economic costs of climate change mitigation (Dixon and Parmenter (1996); Dixon and Rimmer (2002); Adams (2007); Giesecke et al. (2015); Wittwer and Dixon (2015)). Despite the efficacy of CGE models as tools in policy analysis, key linkages between the real and financial economies are often treated implicitly; for example, the current account deficit is assumed to be financed in full by a foreign agent, e.g., via a small country assumption. In an explicit sense we may ask how the foreign investor chooses to finance a deficit, e.g., do they prefer to purchase domestic agent bonds, equity or a combination of the two instruments? What are the associated implications for relative rates]ofreturn across the suite of domestic financial instruments, and how do changes in relative returns affect domestic agent investment decisions, nominal exchange rates, and the real economy? This paper seeks to address such questions via the development of a theory of the financial sector for a traditional dynamic CGE model of the U.S. (USAGE 2.0). We begin with a brief synopsis of the construction of a financial database for the United States (U.S.), which documents the stocks and transactional flows of 5 financial instruments across 11 distinct agents. The financial database derived herein and the approach documented in Dixon et al. (2015), are then used to develop a new financial CGE model of the U.S. called USAGE2F. Explicit recognition of financial stocks and flows broadens the scope of CGE analyses to include the effects of changes in capital adequacy requirements of key financial agents, e.g., the commercial banks, as we illustrate with an example. The results are subsequently compared to findings of a similar policy scenario in Australia, which are outlined in Giesecke et al. (2016). This analysis serves to illustrate how the impacts of regulatory change (in this case, a rise in capital adequacy ratios) can be affected by jurisdiction]specific differences in the structure of the financial sector.

Assessment of a green credit policy aimed at energy-intensive industries in China based on a financial CGE model

A financial computable general equilibrium model is established to quantitatively calculate the systematic effects of a green credit policy. The punitive high-interest rate is applied to the energy-intensive industries as the green credit policy. This study is focused on the following industries: paper, chemical, cement, and iron and steel. Short-, medium- and long-term scenarios are used to conduct experiments representing the green credit policy. Then, a scenario is simulated wherein a green security policy and the green credit policy are carried out simultaneously. Finally, effects of the green credit policy, a differential electricity price policy, and a raised production tax policy towards the energy-intensive industries are compared. The results show that the green credit policy is effective in suppressing the investments in energy-intensive industries, and it is comparatively less effective in adjusting the industrial production structure. The green security policy helps the green credit policy to reduce the total financing of the target industries, but it brings more negative impacts on the economy. Although the policies of differential electricity prices and raising production taxes support the output structural adjustments, their negative effects are much larger than those of the green credit policy.

Macroeconomics of twin‐targeting in Turkey: analytics of a financial computable general equilibrium model

The paper provides an overview of the post‐1998 Turkish economy and constructs a macroeconomic computable general equilibrium (CGE) model to illustrate the real and financial sectoral adjustments of the Turkish economy under the conditionalities of the ‘twin targets’: on primary surplus to gross national product (GNP) ratio and on the inflation rate. We further utilize the model to study three sets of issues: (i) the critical role of the expanded foreign capital inflows in resolving the macroeconomic impasse between the disinflation motives of the central bank and imperatives of debt sustainability and fiscal credibility of the ministry of finance; (ii) reduction of the central bank's interest rates, and (iii) a labor market reform of reducing payroll taxes. Our simulation results suggest that the current monetary strategy, which involves a heavy reliance on foreign capital inflows along with a relatively high real rate of interest, is effective in bringing inflation down; yet it suffers from increased cost of interest burden to the public sector, and strains fiscal credibility. In contrast, given the ex ante constraints of the domestic economy in the short run, an alternative heterodox policy of reduction of the central bank interest rate and lowering of the payroll tax burden in labor markets indicate strong employment and growth effects along with strengthened fiscal credibility.

The Internal and External Transfers of the Turkish Economy: A Financial Computable General Equilibrium Analysis

After the introduction of 1980 stabilization program, both the internal and external transfer problems gained importance for the Turkish economy. This study analyses interactions between the real and financial sectors of the Turkish economy within the framework of a Financial Computable General Equilibrium model, based on 1990 data. In the model, real and financial sub-models are interrelated through various channels such as flow of funds, interest rate and monetary policy. One of the main conclusions to be drawn from the analyses is that in the case of fixed real wages the adverse effects of policy changes on the economy are much larger compared to the case of fixed nominal wages.