General Equilibrium Model Of Economy Research Articles

Parameter instabilities and monetary policy in a small open economy: Evidence from an estimated model for the UK

This paper reconsiders whether monetary policy in small open economies responds to exchange rates by studying possible parameter instabilities in a Dynamic Stochastic General Equilibrium model. The main focus of the paper is to revisit preceding evidence on the response to exchange rate movements by the Bank of England and determine if its reaction function has remained constant throughout the sample. To this end, I estimate a small open economy general equilibrium model using Bayesian econometric techniques over rolling windows. I find overwhelming evidence of shifts in several parameters, including those related to the policy rule. Furthermore, posterior odds tests reveal a time-varying response to exchange-rate fluctuations by the monetary authorities. The results favor the model with the nominal exchange rate embedded in the policy rule for the initial subsamples. However, the evidence steadily evolves across windows and ultimately changes to prefer the model specification with no exchange rate. The paper also documents evident variations in the model dynamics derived from the instability of parameters via rolling-window impulse response functions and variance decomposition analysis.

Simulation of Green Tax Effects on Health Indicators and Welfare in Iran: General Equilibrium Model of Economy, Energy and Environment (GEM-E3)

Simulation of Green Tax Effects on Health Indicators and Welfare in Iran: General Equilibrium Model of Economy, Energy and Environment (GEM-E3)

Water Charge and Conservation of Natural Areas: An Ex‐Ante Assessment of a Policy Proposal for the Mantiqueira Region, Brazil

AbstractWater plays a central role in several socioeconomic and environmental nexuses. Faced with various anthropogenic pressures that act as water scarcity drivers and knowing that the unavailability of water can be a limiting factor for economic development, there is an urgent need for the design and evaluation of economic instruments that help in the management of water resources. This article presents a proposal and assessment for a Pigouvian water charge instrument. The instrument suggests imposing a charge based on the amount of water consumed, targeting the agriculture, livestock, forest extraction, and aquaculture sectors. The revenue generated from this charge could be utilized to fund reforestation initiatives and support government expenditures, thereby creating both environmental and economic advantages. Based on a calibrated static computable general equilibrium economic model for the Brazilian Mantiqueira region, it was possible to estimate that a water charge policy at a rate of R$ 0.10/m3 (US$ 0.026/m3) could lead to an increase in the Brazilian GDP in the benchmark year by US$ 10.7 million. Economic benefits could also be verified at the regional level, especially in those areas where there are water‐intensive economic activities. On the environmental side, the water charge could incentivize actions capable of recovering approximately 80 km2 of natural areas.

Using input-output tables to set goals

Within the framework of the presented article, the authors consider the issue related to the construction and use of input-output tables necessary to determine the main goals. In particular, the input-output model is considered, which reveals in detail the links between different sectors of production in the economy, due to which, with a detailed analysis, it is possible to compile a number of tables that fully show the country's production by industry. The authors focus on the fact that this model can be effectively used by the ground artillery of the ground forces of the Russian Federation in drawing up a diagram that can show both the rear communications of the enemy and all of its production, which is somehow used for military purposes. In addition, the authors note that this model is based on the general economic equilibrium model, which, in turn, allows not only to study the relationship in the economy and determine the intersectoral balance, but also to detect weak points in the economy. The article emphasizes the need to apply the input-output model in the military industry, since today, due to the aggravation of the geopolitical conflict, the supply of the military-industrial complex is vital for any army, and often the effectiveness of the supply determined the outcome of battles or the preparation of turning points in wars. The article presents a number of tables and formulas that reflect the calculations and assessment of the costs of different groups of troops, which emphasizes the universality of the model under consideration. The final part of the article is devoted to highlighting the factors that must be taken into account in the management of artillery units and in order to achieve their goals.

The Poverty Impacts of Labor Heat Stress in West Africa Under a Warming Climate

AbstractThis paper assesses the poverty implications of heat stress‐related labor capacity losses based on simulations using a global general equilibrium economic model. Compared with past studies, we use a more precise measurement of heat stress, assign labor capacity losses to specific labor types by sector, and employ an economic model that contains highly disaggregated economic sectors and regions. This model allows us to determine global and regional economic impacts that account for international dependencies. We focus attention on seven West African countries for which we determine the implied changes in real incomes of households near the poverty line. For these countries, we use household microsimulations to determine potential impacts on the poverty headcount. In our results, poverty impacts are heterogeneous across countries and earning sources‐based household strata. A key channel behind this heterogeneity is how loss of labor productivity affects the relative returns to factors of production. We find that unskilled agricultural wages could increase, as loss of productivity in the face of inelastic food demand induces increased labor demand in order to dampen agricultural output losses. In our experiments, even neglecting potential increases in mortality and morbidity, poverty increases range from 2.3% in Cameroon to up to 7.2%–9.2% in Ghana and Nigeria. In one of the seven countries considered, Guinea, poverty sees little change due to the mitigating effects of rising labor wages.

Towards the theory of general economic equilibrium

The paper proposes a model of general economic equilibrium, when some firms can influence prices by their actions. Their primitives (that is, the description of production, distribution, and consumption) of the proposed model are the same as those of the Arrow–Debreu model. The difference lies in the behavior of oligopolistic firms: it is assumed that they (as in the original Cournot model) assign their production plans. The main innovation is the description of the decision-making process on production plans by oligopolistic firms. In previous models, it was assumed that oligopolistic firms seek to maximize profits at current prices. Here, a more natural assumption is made that oligopolistic firms make decisions about production plans through a vote of shareholders. It is shown how the Arrow–Debreu model can be modified to account for this circumstance. The concept of Condorcet–Cournot–Walras equilibrium is introduced, combining the ideas of these three classics. The question of the existence of equilibria is discussed. A simplified version of the model is also considered, in which each firm is owned by one agent. The simplification is that there is no need to turn to the voting.

Hybrid Framework Linking Energy Systems and General Equilibrium Economic Models to Evaluate Climate Change Mitigation Policies for the Transport Sector in Rio De Janeiro, Brazil

Hybrid Framework Linking Energy Systems and General Equilibrium Economic Models to Evaluate Climate Change Mitigation Policies for the Transport Sector in Rio De Janeiro, Brazil

Evaluation of Transport and Location Policies to Realize the Carbon-Free Urban Society

The Japanese Government has declared that it will become carbon-free by 2050. Urban planning to realize a carbon-free society is proposed in the context of urban transport policy, which are policies to agglomerate urban facilities and link among them by public transport. However, transport and location policies to regulate land use are afraid to generate an economic loss. It is important to evaluate not only the effects of reducing GHG emissions but also economic influence. In this paper, we built the Computable General Equilibrium and Urban Economic (CGEUE) model, which modeled the transport and location behavior of each economic agent for a detailed area explicitly. We evaluated some transport and location policies such as (1) conversion from fossil fuel vehicles to electric vehicles, (2) improvement of public transport, (3) environmental tax and (4) making city compact by using the CGEUE model. As a result, it can be concluded that the combination policy of improving the public transport policy and environmental tax is the most effective under the conditions of these simulation results.

General equilibrium impact evaluation of food top-up induced by households’ renewable power self-supply in 141 regions

This article employs a global computable general equilibrium economic model (GTAP-E-PowerS) to examine the impact on the world economy if households in every country self-supply power to meet 30–100% of residential demand, with subsequent monetary savings diverted to consuming more food. Results show the power generation sector reduces output levels by 14%–42% across various countries if households 100% self-supply. Coal mining sectors are adversely affected in numerous countries with contractions of 9%–28% ($6,086-$18,935 million) in the United States and 4%–13% ($2,505–$8,143 million) in Australia. Improved outcomes for the world environment are found with reductions of CO2e emission levels of 2.24%–7.38% (or 924–3,042 MtCO2 equivalent). The agriculture and food-processing sectors expand significantly in many countries but also cause major increases in land prices, particularly in land-scarce countries in Middle East, Europe, Japan, and Taiwan. Results also show the security of food and energy supply are improved along with environmental gains from lower emission levels. However, the energy sector is adversely affected and those countries with a heavy reliance on fossil fuel extraction and mining activities experience significant reductions in real GDP.

Ціннісні засади рівноважного економічного розвитку в умовах новітніх глобальних викликів

The paper reveals that the formation of the information society at the turn of the century with a focus on a network economy marked the beginning of the economic relations and laws system global modification. This modification is due primarily to the latest technological changes and innovations in information and communication. However, in its profound nature, it has a value character and is associated with the need for a thorough understanding of the new socio-economic picture of the world. The traditional interpretation of this situation does not meet public expectations about progressive, creative development possibilities. Public dissatisfaction with globalisation is growing. Phenomena of socio-economic instability (turbulence) and uncertainty undermine the civilisational foundations of the social economy, create several global challenges and threats. It is shown that an adequate guideline for successful management is to ensure balanced social development through the development of a holistic institutional architecture, which operates under the laws of effective economic equilibrium. Economic theory is designed to substantiate the laws of operation and the principles of building the institutional architecture of management. At the same time, modern economics remains traditional, while the correct answer to the global social demand must be given by relativistic economics, which can form the socio-economic foundations of the phenomenon of relativity. It is determined that the concept of the institute as a transformed form of economic value (economic good, the only one in the triple definition of marginal utility, value, and price) is an adequate basis for building relativistic economics, methodological source of creative knowledge and formation of the latest holistic picture of the world. It is noted that the tools of value economic analysis (in particular, the model of general economic equilibrium) were formed in the depths of classical political economy, but today it needs to be updated. It is established that the methodological restoration of economics as a valuable source of a positive relativistic understanding of the latest world picture is an essential agenda for further creative research to determine the principles of building an economy of trust forerunner of the institutional architecture. The basis of such an economy is a public sector model focusing on the market of public goods, which harmonises the system of public interests, processes of self-organisation and organisation in the economy, thus contributing to the formation of effective mechanisms for stabilising social development.

Trade credit, trade income elasticity and the international transmission of shocks

The paper examines the impact of trade credit on cyclical fluctuations in international trade. It provides new empirical evidence based on firm-level UK and Irish data showing that exporters use trade credit more actively and intensively than non-exporters. The study introduces inter-firm lending into an open economy general equilibrium model with heterogeneous firms and endogenous entry into the exports market. It demonstrates that trade credit amplifies the impact of macroeconomic shocks on international trade both along the intensive and extensive margins and that it significantly contributes to the high trade income elasticity observed in the data.

Unlocking the Mystery of the Origins of John von Neumann’s Growth Model

In his famous “A Model of General Economic Equilibrium”, von Neumann wrote that it was “obvious to what kind of theoretical models [his] assumptions correspond.” To date, however, his sources of economic insights about the functioning of the continuously growing price-economy that he modeled have remained a total mystery. Based on archival material, this mystery is solved in this account by making visible the specific influences from economics and mathematics that inspired him. I argue that von Neumann’s 1937 paper resulted from a deep engagement with economics as it was emerging at the beginning of the 1930s and that this happened as he was travelling and crossing national boundaries while bridging distinct branches of mathematics with different local perspectives in economics. His encounters with Jacob Marschak in Berlin, Nicolas Kaldor in Budapest, and Frank Graham in Princeton as well as his reading of Walras’s, Wicksell’s and Cassel’s work would be key. I also explain how he came to realize that there existed a formal analogy between systems of linear equations and inequalities with which he characterized (stationary and dynamic) economies and the minimax theorem for two-person zero-sum games that he had conceived and proved in 1928.

Presentation of a Mathematical Model for Optimal Portfolio in the Form of a Dynamic Stochastic General Equilibrium Model for Economy of Iran

One of the most important aspects of investment is determining the “optimal investment portfolio”. To date, scientific research has been conducted to determine the optimal portfolio with “artificial intelligence” and “Fuzzy logic”. However, we determine the optimal portfolio based on Dynamic Stochastic General Equilibrium (DSGE) model. On the other hand, several factors affect returns, which is one of the most important issues in investment decision-makings, and various models have been developed to analyze the return of “capital” and “other assets”. In this regard, some of the most important models include linear and non-linear models, artificial neural network models, Fama–French model, Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) model, and optimal stable model. All of these models are indicative of the use of quantitative methods and models in the investment industry. One of the causes of using these models is developing the financial economy. In fact, the development of financial economy has more increased with the concept of “portfolio optimization”. In fact, the portfolio optimization and diversification concept is the basis of developing and expanding classical finance and financial decision-making. Financial markets, especially the capital market, can have a great deal of relevance to other sectors of the economy. In the present study, we design and calibrate a new Keynesian DSGE model in relation to the optimal investment portfolio and effectiveness of shocks (e.g., productivity and foreign exchange earnings fluctuation) on macroeconomics variables.

Modelling the economic impact of COVID19 under different policy choices: Mitigation versus suppression when time is a scarce resource

Keogh-Brown et al.(2020) illustrate the application of economic modelling to inform and guide policy making during the COVID-19 pandemic in the UK. The methodology is based on linking a general equilibrium economic model to a simple epidemiological model of the infection. In this commentary a number of issues are discussed relating to the construction and application of the model, and the implications of the findings for government policies.

Exact Penalization of Generalized Nash Equilibrium Problems

This paper presents an exact penalization theory of the generalized Nash equilibrium problem (GNEP) that has its origin from the renowned Arrow–Debreu general economic equilibrium model. Whereas the latter model is the foundation of much of mathematical economics, the GNEP provides a mathematical model of multiagent noncooperative competition that has found many contemporary applications in diverse engineering domains. The most salient feature of the GNEP that distinguishes it from a standard noncooperative (Nash) game is that each player’s optimization problem contains constraints that couple all players’ decision variables. Extending results for stand-alone optimization problems, the penalization theory aims to convert the GNEP into a game of the standard kind without the coupled constraints, which is known to be more readily amenable to solution methods and analysis. Starting with an illustrative example to motivate the development, this paper focuses on two kinds of coupled constraints, shared (i.e., common) and finitely representable. Constraint residual functions and the associated error bound theory play an important role throughout the development.

How “Green Knowledge” Influences Sustainability through Behavior Change: Theory and Policy Implications

The urgent and critical challenges of transforming patterns of behavior from current unsustainable ones are encapsulated in the 2015 UN Sustainable Development Goals (SDGs). Central to these goals and targets are systems of sustainable consumption and production. This crucial goal depends on consumers and producers making choices that depend on knowledge available to them and on other factors influencing their preferences in accordance with norms and culture. This paper investigates how “green knowledge” (i.e., knowledge of ecologically and socially sound products and practices) influences sustainability in the intersections of knowledge, preferences, behavior, and economic and environmental performance. By employing a general equilibrium economic model, we show that consumers, producers, and industry regulators with different degrees of knowledge and concern about the health and environmental benefits of products and production would lead to different economic and environmental consequences. As “green knowledge” influences consumption patterns and government policy-making, our model shows that, in principle, there will be a shift in the content of the economy to that which supports the achievement of long-term sustainability.

The Multisector Applied Computable General Equilibrium Model for Italian Economy (MACGEM-IT)

The continuous evolution of the institutional and regulatory framework requires the development of analysis instruments able to support the policy maker in designing and evaluating the impact of specific policy measures for the achievement of selected targets. With this intent, the MACGEM-IT model is developed to measure the aggregate and disaggregated, direct and indirect impacts of economic policy proposals within the economic system. Specifically built to reflect the characteristics of Italian economy, MACGEM-IT is a multi-input, multi-output and multi-sector static CGE model calibrated on the Social Accounting Matrix for Italy. It incorporates rigidities on prices, market imperfections and specific constraints on the behaviour of selected institutional sectors. The capability of the model to track the transmission mechanisms of policy measures and identify their direct, indirect and induced effects in the economy, is tested through a set of fiscal policy simulations.

DSGE-MODEL FOR RUSSIAN ECONOMY WITH BANKS ANDFIRM-SPECIFIC CAPITAL IN CORONAVIRUS PANDEMIC

The article presents a dynamic stochastic general equilibrium model (DSGE-model) for the Russian economy. The model describes the behavior of the following macroeconomic agents: households, real sector, banking sector, Central Bank, as well as the interactions between them and the world. Household modeling uses the external habit formation approach to account for the inertia of preferences. To model the real sector, we abandoned the most common approach which assumes that the decision on investments is made by the households as the owners of production factors. Instead, we took the firm-specific capital approach which assumes that the decision on investment is made by the firms themselves. The study also considers that in Russia, fixed assets are mostly invested from the firms' own funds. To account for the investment inertia in the fixed asset in a real sector model, the expenditures are transferred to the commissioning of new facilities, the Calvo model is applied to describe the price setting under the monopolistic competition. A banking sector which defines the loan and debt interest rates to the key Central Bank interest rate is chosen to be a link between the households and firms in the model. The Taylor equation is used to describe the monetary policy of the Bank of Russia under the inflation targeting, while an inertia factor is included into the equation with the uncovered interest parity for the budget rule which regulates the purchases (or sales) of the currency by the National Welfare Fund. The final linearized model is a system of 23 difference equations with rational expectations. Based on the proposed model, calculations were made and key macroeconomic indicators were forecasted for 2020–2021 on a quarterly basis for the Russian economy. The calculations account for the relevant recessionary factors: oil price fall, oil production cut in OPEC+ deals, quarantine measures aimed to prevent the spread of the corona virus infection, anti-recessionary measures of the RF Government. The findings show that the economic downturn in 2020 can be from 5 to 7% under COVID-19 pandemic. Growth in 2021 is estimated to be within 3–5%. The developed model can be used for scenario projecting for the Russian economy, upgrading the monetary policy of the Bank of Russia, and for developing applied quarterly projection models (QPM). The model could be further modified by including more elements: decomposing the household sector into the Ricardian and non-Ricardian ones, identifying the resources industries and industries in the real sector which manufacture the invested goods, including the key taxes and budget expenses into the model. One more promising area is to analyze the equilibrium of the interest rates when large firms could accumulate their own financial resources. This prerequisite decreases the demand for the bank loans from the real sector and, thus, leads to lower, including the negative, interest rates. The proposed approach enhances the quality of a DSGE model as a predictive tool for making the political and managerial decisions. Keywords mathematical modeling of economy, structural macroeconometrics, dynamic stochastic general equilibrium models, DSGE models, rational expectations, inflation targeting, monetary policy, budget rule, Taylor equation, scenarios projection, COVID-caused crisis, COVID-19 pandemic. Acknowledgements The author thanks A.B. Polbin, the Deputy Head of the Macroeconomic Modeling Department in Gaidar Institute for Economic Policy for valuable comments and recommendations during the model development.

A general equilibrium model for transportation systems with e-hailing services and flow congestion

Passengers are increasingly using e-hailing as a means to request transportation services. Adoption of these types of services has the potential to impact the travel behavior of individuals as well as increase congestion and vehicle miles driven since extra deadhead miles must be added to the trip (e.g., the extra miles from the driver location to the pick-up location of the customer). The objective of this paper is to develop a basic mathematical model to help transportation planners understand the relationship between the wide-scale use of e-hailing transportation services and deadhead miles and resulting impact on congestion. Specifically, this paper develops a general economic equilibrium model at the macroscopic level to describe the equilibrium state of a transportation system composed of solo drivers and the e-hailing service providers (e-HSPs). The equilibrium model consists of three interacting sub-models: e-HSP choice, customer choice, and network congestion; the model is completed with a “market clearance” condition describing the waiting costs in the customer’s optimization problem in terms of the e-HSPs’ decisions, thereby connecting the supply and demand sides of the equilibrium. We show the existence of an equilibrium of a certain kind under some mild assumptions. In numerical experiments, we illustrate the sensitivity on the usage of these modes to various parameters representing cost, value of time, safety, and comfort level, as well as the resulting relationship between usage of these services and vehicle miles.

A Regional Economy-Energy-Transport Model of the EU for Assessing Decarbonization in Transport

The EU decarbonization strategy foresees deep cuts in CO2 in the transport sector. Investment in infrastructure, manufacturing of new technology vehicles and production of alternative fuels induce macroeconomic changes in activity and employment for both national and regional economies. The objective of the paper is to present a newly built macroeconomic-regional model (GEM-E3-R general equilibrium model for economy, energy and environment for regions) for assessing impacts of transport sector restructuring on regional economies of the entire EU, segmented following NUTS-3 (nomenclature of territorial units of statistics). The model combines general economic equilibrium theory with location choice and New Economic Geography and implements a dynamic, fully endogenous agglomeration-dispersion mechanism for people and industries coupled with a gravity model for bilateral interregional flows. A novelty of the model is a two-layers structure: (i) the country-wide layer formulated as a global multi-sector, multi-country and multi-period computable general equilibrium (CGE) model; and (ii) the regional economy layer, which simulates impacts on regional economies, while considering country-wide economic trends as boundary conditions. The paper presents a use of the model in the assessment of regional economic effects of electrification of car mobility in Europe and wide use of domestically produced advanced biofuels.