General Equilibrium Framework Research Articles

Exclusion and the growth of AI technology: a trade-theoretic analysis

This study provides a four-good general equilibrium framework with international trade for assessing the impact of the advancement of automation and artificial intelligence (A&AI) on the welfare of a group of agents who are excluded from both owning productive assets, such as capital and land, as well as consuming digital output (digital exclusion). We show that, depending on the magnitude of the factor intensities, the accumulation of A&AI capital may negatively affect the income of the excluded group, who provide unskilled labor, or the owners of land. In doing so, we bring out the conflict of interests that may arise between the owners of A&AI capital and other groups within society, which has implications for the pressure that exists to slow down the adoption of A&AI in an economy.

Economy-wide Impacts of India–UAE CEPA: A CGE Analysis

The present study investigates the potential trade effects of tariff liberalisation under India–United Arab Emirates (UAE) Comprehensive Economic Partnership Agreement (CEPA) using general equilibrium analysis. The study specifically examines output, employment, exports and welfare effects of India–UAE CEPA in computable general equilibrium (CGE) framework using the Global Trade Analysis Project (GTAP) model and database version 10. The study indicates output gains in manufacturing sector for both countries and an increase in demand for unskilled labour in India. The study argues that the CEPA will result in an increase in global exports of all commodity groups for both India and UAE and a substantial gain in bilateral exports of both countries. The present study suggests that deeper integration through tariff reduction on imports under India–UAE CEPA will be welfare enhancing for both India and UAE. Overall results show that there is a lot of untapped potential to bring the welfare gains for both trading partners. Given the present schedule of tariff reduction of CEPA, a win–win scenario will emerge for both partners in short as well as long run. Finally, the study cautioned about the implications of sensitive list for trade effects and protection from misuse of rules of origin in the CEPA. JEL Codes: F1, F13, F14, F15, F17

Public infrastructure provision in the presence of terms‐of‐trade effects and tax competition

AbstractThis paper analyses and compares the performance of resource taxes and capital taxes in financing public goods while considering the positive effects of public expenditure on firm productivity. It is motivated by Franks et al. (2017), who argue that the advantage of the resource tax consists in its potential to reap foreign resource rents. I employ an analytical general equilibrium framework of identical resource‐poor countries, where local firms use internationally mobile capital and a net imported resource in production as well as local public infrastructure. The latter is financed solely by either taxing the input of the resource or capital. The choice of the policy instrument is exogenous to policy makers and symmetric across countries. I find that expenditure on infrastructure renders the impact of fiscal policy on the terms of trade ambiguous under resource taxation and negative under capital taxation. Moreover, public expenditure weakens the outflow of factors moderating the deficit of public spending caused by tax competition. This holds for both policy scenarios. Considering both effects simultaneously, resource taxation cannot generally be identified as the policy to provide higher provision or efficiency. A numerical exercise shows cases for higher provision of either policy.

Accommodating the Rise in Urbanisation: Are New Towns a Good Solution?

Abstract This paper studies the performance of New Towns, i.e., planned large urban subcenters, as a central tool to accommodate the global rise in urbanisation. A spatial quantifiable general equilibrium framework suitable to study large-scale urban master plans is presented. The framework is then used to investigate the equilibrium effects of five New Towns developed in the 1970s in Paris’ metropolitan area. By 2015, the development of New Towns appears to have increased metropolitan population (+18%), metropolitan GDP (+11%), and reduced average commuting times (-6.9%). The results obtained for Paris’ metropolitan area are externally validated using a Difference-in-Differences approach on all 314 New Towns developed worldwide between 1992 and 2012.

Impacts of commodity prices and governance on the expansion of tropical agricultural frontiers

Deforestation in the tropics remains a significant global challenge linked to carbon emissions and biodiversity loss. Agriculture, forestry, wildfires, and urbanization have been repeatedly identified as main drivers of tropical deforestation. Understanding the underlying mechanisms behind these direct causes is crucial to navigate the multiple tradeoffs between competing forest uses, such as food and biomass production (SDG 2), climate action (SDG 13), and life on land (SDG 15). This paper develops and implements a global-scale empirical approach to quantify two key factors affecting land use decisions at tropical forest frontiers: agricultural commodity prices and national governance. It relies on data covering the period 2004–2015 from multiple public sources, aggregated to countries and agro-ecological zones. Our analysis confirms the persistent influence of commodity prices on agricultural land expansion, especially in forest-abundant regions. Economic and environmental governance quality co-determines processes of expansion and contraction of agricultural land in the tropics, yet at much smaller magnitudes than other drivers. We derive land supply elasticities for direct use in standard economic impact assessment models and demonstrate that our results make a difference in a Computable General Equilibrium framework.

On the provision of excludable public goods: General taxes or user prices?

AbstractThis paper compares some of the most common ways of financing the provision of publicly provided impure public goods/services in a unified dynamic general equilibrium framework with heterogeneous income groups. The focus is on the effects of user prices on individual incentives and how the latter shape aggregate outcomes and distribution. We show that a market‐like mechanism of user prices not only improves individual incentives and enhances aggregate efficiency, but it is also Pareto improving. However, such a mechanism is not beneficial or simply collapses when social externalities are strong, when the government adopts a mixed system that combines user prices with heavy subsidization of user costs, and when there is a minimum amount of the good that everybody needs.

The distributional impacts of high speed rail: Evidence from China

This paper develops a spatial general equilibrium framework to study the distributional impacts of high-speed rail (HSR) construction. HSR does not directly lower the trade costs but lowers the travel costs among cities. This encourages firms to gain larger market share in the destination city, and export to more distant markets. We estimate the matrix of travel costs among 279 prefectural-level Chinese cities by taking into account the real world geography. The model is calibrated to the Chinese economy to match stylized facts since 2005. We show that the improvements of passenger networks lead to higher inter-regional trade and increase the total real income by 3:07 percent. The cities unconnected to HSR are also found to enjoy income gain from the HSR construction. HSR construction directs more people to work in the inland region. Both labor mobility and international trade serve to amplify the income growth from HSR construction.

Consequences of ecological aggregation in general equilibrium analysis of perturbed ecosystems

A computable general equilibrium (CGE) model is linked with a spatially explicit model of the Lake Michigan ecosystem to assess welfare impacts of the current threat of Bigheaded carp, a non-indigenous aquatic invasive species (AIS) projected to have spatially explicit and species-specific impacts on the ecosystem. Disaggregating to model spatial decisions and spatially explicit species compositions in general equilibrium frameworks comes at a cost of additional complexity and data requirements. Whether these investments are worth the effort over extant ecological aggregations is the focus of this analysis, as typical methods consider spaceless aggregations across locations and aggregate over species. Here, the implications of aggregating over space and/or species are quantified. Results signal welfare losses from the bigheaded carp invasion, and that aggregating over one/both dimensions may miss important bioeconomic tradeoffs especially with respect to species.

Credit Risk Sharing and Credit Market Regulation

Abstract I show how aggregate risk influences credit default swap (CDS) markets and CDS regulation in an analytically tractable general equilibrium framework. For low aggregate risk, the equilibrium with unregulated CDS markets is efficient with bondholders being fully insured. A general efficient allocation can be implemented via transfers alone. For intermediate aggregate risk, a margin requirement on CDS sellers is also necessary to implement the general efficient allocation. If aggregate risk is sufficiently high, unregulated CDS markets break down. A margin requirement on CDS sellers restores equilibrium and efficiency, but it must be maximally stringent and accompanied by constraints on CDS purchases by buyers. (JEL G22, G28, D52)

Economies with rights: Efficiency and inequality

AbstractWe consider a scenario where inequality levels originate harmful effects on society. To alleviate this negative externality, we introduce tradable consumption licenses within a general equilibrium framework to obtain efficient outcomes, reduce inequality, and improve social welfare. This mechanism would be easily implementable with the necessary support of the law.

REGULATORY PROTECTION AND THE ROLE OF INTERNATIONAL COOPERATION

AbstractI develop a general equilibrium framework to analyze the welfare consequences of product regulations and their international harmonization. In my model, raising product standards reduces a negative consumption externality, but also increases the marginal and fixed costs of production. When product standards are set noncooperatively, the effects of standards on other countries' wages and number of firms are not internalized, giving rise to an international inefficiency. The World Trade Organization's nondiscrimination principle of national treatment only partly addresses this inefficiency. Welfare losses from abandoning national treatment average 2.8%, whereas the maximum welfare gains from efficient cooperation average 11.8%.

The Gold Standard and the international dimension of the Great Depression

Abstract Was the Gold Standard a major determinant of the onset and protracted character of the Great Depression of the 1930s in the USA and worldwide? In this paper, we model the “Gold Standard hypothesis” in an open-economy, dynamic general equilibrium framework. We show that encompassing the international and monetary dimensions of the Great Depression is important to understand the turmoil of the 1930s. In particular, the Gold Standard turns out to be a strong transmission mechanism of monetary shocks from the USA to the rest of the world. Our results also suggest that the waves of successive nominal exchange rate devaluations coupled with the monetary policy implemented in the USA might not have enhanced the recovery.

Consumption taxation to finance pension payments

To assess how a permanent shift from financing a public pay-as-you-go pension by direct taxation toward financing it by indirect taxation affects the economy and welfare, we use an overlapping-generations-augmented two-region general equilibrium framework with search frictions on the labor market. The analyzed tax reform partially shifts the tax burden from domestic to foreign producers, lowers marginal costs of domestic production and generates positive domestic macroeconomic effects. Furthermore, the partial postponement of a household’s tax burden to retirement leads to higher savings and increases domestic assets; however after the implementation of the tax reform, the policy-induced increase in consumption costs makes retirees and households close to retirement worse off. Moreover, the increase in domestic net foreign assets implies that consumption of foreign households eventually falls, which contradicts results commonly found in models without an endogenous savings motive.

Tax wedges, financial frictions and misallocation

We revisit the classical result that in a closed economy the incidence of corporate taxes on labor is approximately zero. We consider a rich general equilibrium framework, where agents differ in the level of their wealth as well as in their managerial and working ability. Potential entrepreneurs go through all the key decisions affected by corporate tax changes: the choice of (i) occupation, (ii) organizational form, (iii) investment, and (iv) financing structure. We allow both for the presence of financial frictions and the traditional tax advantage of debt over corporate equity, which jointly generate misallocation of capital and talent. In this environment we characterize the effects of increasing corporate taxes both analytically and for a calibrated version of the model. We show that this tax increase reallocates production from C corporations to pass-through businesses. Since, due to distorted prices, the latter have higher capital-labor ratios, this reallocation generates a reduction in labor productivity and wages. Furthermore, the corporate tax increase induces some C corporations to reorganize as pass-throughs, which implies more restricted access to external funds and thus a socially inefficient downsizing of production in these firms. Finally, the tax increase causes further misallocation of talent by inducing agents with low wealth relative to their managerial talent to switch from entrepreneurship to being workers, while the reverse happens for agents with higher wealth and lower managerial skills. Overall, we find that both labor and capital bear a large share of the corporate tax incidence, while entrepreneurs are net beneficiaries of the tax change.

Gender Wage Gap in Indian labour Market and Role of Government Policies: A Theoretical Perspective with an Empirical Overhaul

"The long-lasting practice of wage gap against female labour forces in the Indian labour market has been dealt with in this paper by the help of building up a general equilibrium framework along with capturing the issue by econometric analysis. It is the women labour force associated with informal sector as casual labour who suffer the most from this problem. The recent statistics even show a falling trend of female labour force participation in these sectors also. Our study traces through the causes behind such wage discrimination and the possible ways of coming out of it. We have found that investment in female human capital development actually helps women to forego present employment opportunities in low-skilled, low-wage sectors, rather encourages the to be more productive and efficient by means of more human capital and enter the labour market in future with no such wage discrimination, in practice. Such trends, observed in India actually glorifies the success of several Government Policies, such as “Beti Bachao Beti Padhao”, implemented for female human capital development. Falling trend of female labour force in informal economy is actually enabling them to enter the formal economy at par with their male counterparts. Our theoretical findings have been supported by our econometric analysis based on the application of Oaxaca-Blinder model and PLFS unit level data of 2021-22. It suggests the higher women are educated as well as skilled, the lower is wage gap they face and more equal is the pay-structure even in the informal economy. Hence, it is the success of government policies directed for development of human capital in women that we have started to observe. The study strongly recommends implementation of many more such women-centric programme that would strengthen the women socially as well as ensure equality for them at the workplaces."

Ronald H. Coase, Friedrich A. Hayek, and the Institutional Structure of Production and Exchange

AbstractThe essay investigates the parallels and connections between Friedrich A. Hayek and Ronald H. Coase. It emphasizes the shared context at the London School of Economics (LSE) in the 1930s within which both authors reacted, in particular the role of the so-called LSE tradition on opportunity cost. We focus attention on the same pattern of institutional reaction to the formal similarity proposition of neoclassical general equilibrium theory exposed in both authors. In “The Nature of the Firm” (1937a), Coase’s pioneer transaction cost argument was decisively constructed and shaped by the controversy around the possibility of rational economic calculation under socialism. This debate was crucial to Hayek’s fundamental reformulation of neoclassical equilibrium analysis in terms of a social coordination problem in “Economics and Knowledge” (1937). In a parallel manner, although focused on the microstructure of production, Coase (1937a) was reacting to the standard general equilibrium theory and its postulates. Traditional microeconomic theory could not explain the decisions to make within the firm or to buy in the market, nor the many hybrid organizational arrangements that lie between the centralized firm and the decentralized market process. In “The Problem of Social Cost” (1960), Coase develops his argument advanced in 1937 to the welfare corollaries of the general equilibrium framework encapsulated in the first and second welfare theorems. In this case, the connection was made through the influential ideas of his long-LSE friend, Abba P. Lerner. Finally, the essay explores Hayek’s instrumental role in the intellectual and institutional foundations of the Law and Economics movement at the University of Chicago.

Transmission of housing bubbles among industrial sectors

We find that housing bubbles are accompanied by sluggish demand in non-housing-related sectors both currently in China and previously in Japan. To explain this, we construct a theory to model the differential impact of housing bubbles on housing-related and non-housing-related industrial sectors by combining the neoclassical framework of general equilibrium with the input–output table. We also find that the housing bubble increases investments and output prices in housing-related sectors (crowding-in effect) while simultaneously reducing investments and output prices in non-housing-related sectors (crowding-out effect). Our theoretical findings could explain the negatively significant correlation between housing or land prices and the Consumer Price Index (CPI) during China and Japan’s bubble economy eras. Hence, this paper provides new insights into why and how the housing bubble distorts the economy differentially, for different industrial sectors.

Asymmetric effects of monetary policy on non-bank financial intermediation (NBFI) assets: a panel quantile regression approach

PurposeThe purpose of this paper is to fill the momentous gap by explicitly investigating the asymmetric effects of monetary policy (MP) on non-bank financial intermediation (NBFI) assets.Design/methodology/approachThe authors utilized panel data from 29 countries for the period of 2012–2020 and used the quantile regression estimation. In addition to simultaneous quantile regression (SQR), the authors also employ quantile regression with clustered data (Parente and Silva, 2016) and the generalized quantile regression (GQR) method (Powell, 2020).FindingsThe empirical results show a significant heterogeneous impact of MP. While there is a positive relationship between MP and NBFI assets (“waterbed effect”) at lower quantiles of NBFI assets, at middle and higher quantiles, MP has a negative impact on NBFI assets (“search for yield” effect). The authors further find that negative impact strengthens as the quantile levels of NBFI assets rise from mid to high. Findings also reveal that “procyclicality” (except higher quantile) and “institutional demand” hypotheses hold. However, regarding “regulatory arbitrage,” mixed results are observed indicating the impact of Basel III requirements.Originality/valuePrevious empirical studies have concentrated on either the Dynamic Stochastic General Equilibrium (DSGE) framework or conditional mean regression approaches and delivered mixed findings of the MP effects on NBFI. The current paper takes a step toward dealing with this issue by deploying quantile regression methodology, which shows the impact of MP on NBFI at different conditional distributions (quantiles) of NBFI assets instead of just NBFI's conditional mean distribution.

Simulating the environmental and economic effects of a carbon tax in Vietnam: a static computable general equilibrium analysis

PurposeA carbon tax has been widely discussed and implemented in developed countries to mitigate carbon emissions, but this measure is still quite new in developing countries. Recently, the ambition of Vietnam's government in mitigating emissions has been mentioned in international commitments. To achieve these targets, the government is making efforts to seek and implement mitigation measures in the country. While carbon pricing was introduced in Vietnam, there is no study simulating the effects of a carbon tax in the country. This study simulates the environmental and economic effects of a carbon tax and then proposes appropriate policies in Vietnam.Design/methodology/approachThis study investigates the impact on the Vietnamese economy within the static computable general equilibrium (CGE) framework. Compared with previous models, the proposed model in this paper is a fairly standard CGE approach that tries to picture the economic system of Vietnam. In addition, a carbon tax on output will be modeled in this framework. This carbon tax mechanism is more flexible and direct when a carbon tax is based on direct emissions by industry level and the industry's carbon intensity. The paper decomposes the Vietnamese economy into 18 different production sectors, based on the different emission levels of CO2. The CGE model makes possible to examine the impact of a carbon tax on the whole economy through all possible channels and to differentiate a separate carbon tax among different production sectors. The impact of a differentiated carbon tax is explored not only at the macroeconomic level but also at each different industrial level. Another feature of this paper is to investigate the impact of reallocation revenue from the carbon tax.FindingsThis paper has found that by designing carbon tax scenarios at different carbon prices ($1/tCO2, $5/tCO2, $10/tCO2) with different targeted industries, this study shows that higher carbon prices cause greater damage to GDP and welfare, but also better reductions in emissions. In addition, a carbon tax on the energy sectors results in milder economic and welfare damage but less emission reduction than when levying on all sectors. At the sectoral level, a carbon tax might cause sectoral restruction. Interestingly, the electricity sector is the most affected and also is the main contributor to reducing emissions in Vietnam. Finally, the study also shows that reallocation policies of new revenue from the carbon tax would reduce the economic damage caused by carbon taxes, and in many cases promote GDP and welfare. However, these policies reduce the environmentally positive impact of the carbon tax and even induce an increase in emissions in some cases.Originality/valueThis paper studies the pure impacts of a carbon tax, it also simulates the impact of several recycling policies where the increased tax revenue is incorporated. Thereby, this research supports to design and implement carbon tax policies in Vietnam. This paper also would contribute to the literature an example of the adoption of the carbon tax in a developing country, and it could be a lesson for others with similar conditions. Compared with previous models, the proposed model in this paper is a fairly standard CGE approach that tries to picture the economic system of Vietnam. In addition, a more flexible carbon tax mechanism is proposed to improve adequate coverage of emission resources.

Money laundering and the privacy design of central bank digital currency

This paper studies the implications of money laundering for the optimal design of central bank digital currency (CBDC). I build a general equilibrium framework to explicitly allow money laundering by agents and income audits by a government. I find that as long as CBDC offers less anonymity than cash, introducing CBDC will decrease money laundering. However, if CBDC still offers a relatively high level of anonymity but a low interest rate, then introducing CBDC will decrease the output from not only agents who launder money but also agents who do not. If CBDC instead offers low anonymity and a high interest rate, then introducing CBDC can increase aggregate welfare without lowering output. Furthermore, introducing CBDC needs not increase the funding costs of banks or decrease bank lending.