General Equilibrium Research Articles

Economic Effects of Simplified Procedures for Claiming Cross-Border Tax Reliefs

Abstract We examine the effect of compliance frictions in reclaiming foreign withholding taxes on Foreign Portfolio Investments (FPI) using a comprehensive panel of FPI stocks of 83 countries, including EU Member States, between 2005 and 2019 and country-pair specific withholding tax rates. We find a negative and statistically significant elasticity of the FPI stock of equity and debt holdings to “overwithheld” withholding taxes. The estimated elasticities imply that a 1 percentage point reduction in “overwithheld” withholding taxes increases the FPI stock of equity holdings by 1.5%. In a second step, we employ a general equilibrium model to quantify the macroeconomic implications of compliance frictions. In absence of costs in the withholding tax refund process, average GDP in the EU countries would increase by 0.26% (equivalent to EUR 46 billion in 2024), while capital and wages would rise by 0.72% and 0.26%, respectively, suggesting noticeable macroeconomic costs arising from such compliance frictions.

Heterogeneous impacts of regional trade liberalisation on export entry and training: A multi‐destination perspective

AbstractThis paper studies how the export participation and labour training decisions of domestic manufacturers are affected by reduced trade barriers due to a regional trade agreement. We develop a general equilibrium model with heterogeneous firm‐level productivity and two export destinations to explain firm performance following regional trade liberalisation. Then, theoretical predictions are tested by generalised difference‐in‐differences estimations. While a single‐destination framework shows that the decrease in India's tariffs leads to increased export entry and training intensity by Chinese manufacturers, the effects of regional trade integration on firms' skill upgrading are heterogeneous in our multi‐destination setting.

Evaluating impacts of agriculture-led investments on sub-Saharan African countries’ growth and poverty

ABSTRACT Our main objective in this paper is to evaluate the economy-wide effects of alternative ways of financing expanded government spending on agriculture investments in selected African countries, with a particular focus on inclusive growth. Many African countries are typically, fiscally constrained and underinvest in agriculture despite its high share in economic growth as well as the high proportion of poor people residing in the rural sector. We use macroeconomic models that are then linked sequentially to a microsimulation model to understand the macro-poverty effects of interventions for each country. Government extra-spending on agriculture is financed successively by direct taxes, cuts in other expenditures and external financing. The results reveal that for countries to increase inclusive economic growth, they need to invest aggressively in agriculture and source the concessional finance externally where this option is available. However, it is also worthwhile for countries to explore combined mixes of external and domestic fiscal sources in order to optimise the impacts on inclusive economic growth. Our main contribution to the literature on poverty-growth-inequality triangle lies in the consistent modelling of the general equilibrium effects of the alternative financing mechanisms of agricultural investments for selected African economies.

Toxicological Impacts of Pendimethalin on the Brain of Cyprinus carpio: A Histopathological Approach

Agricultural pesticides negatively impact aquatic ecosystems. A dinitroaniline herbicide pendimethalin is used to control weeds and unwanted grasses in crop fields but it can reach water streams indirectly and harm aquatic fauna including fish. The main objective of our study was to find histopathological alterations caused by pendimethalin in the brain of Cyprinus carpio. The whole procedure was done using a histopathological approach by processing brain tissue, making slides, and analyzing these slides under a light microscope to observe changes in brain tissue. Acute toxicity was found by obtaining 96h LC50 value i.e., 2.20μl/L. Fishes were divided into 3 groups: The first group was assigned as the control group., second and third groups was administered with 1/10th and 1/15th concentration of calculated 96 h LC50 (I.e., 0.22μl/L and .146μl/L). The key findings of our study demonstrated that control fish brains do not show any morphological changes in structure. The second and third groups exposed to pendimethalin showed severe damage to the brain including vacuolization, necrosis in neurons, deformed pyramidal cells, clustering of nuclei, binucleate formation and nuclear infiltration compared to the control fish brain. The findings of our study have significant implications for understanding the neurotoxic effects of pendimethalin on aquatic species, specifically about brain structure and function. The study emphasizes the crucial role of neurotoxicity assessments in environmental risk assessments, which can save particular species and preserve the general equilibrium and resilience of aquatic habitats.

Assessment of Socio-Economic and Environmental Impacts of Energy Efficiency Improvements in Multi-Apartment Buildings: Case Study of Lithuania

This research aims to assess the socio-economic and environmental impacts of the Lithuanian long-term renovation strategy, focusing on improvements in the energy performance of renovated multi-apartment buildings in the country. The methodology used in the study is centred on the CleanProd general equilibrium model, which is based on publicly available data from the FIGARO database and Eurostat’s non-financial transaction statistics. The four renovation financing scenarios analysed are represented in the model by changes in the demand for energy resources and construction and other transactions related to the renovation programme. To reflect the dynamic nature of the renovation programme, counterfactual equilibria are sought for each year of the renovation programme. The results revealed that renovation of multi-apartment buildings brings net benefits, including long-term increases in gross domestic products (GDPs) and employment, as well as a decrease in economy-wide greenhouse gas (GHG) emissions, and is aligned with the binding European Union’s energy efficiency target to reduce energy consumption at least by 11.7% in 2030 (in comparison to 2020). The Increase in Taxes on Products scenario is modelled as the most favourable scenario. It assures annual GDP growth by 0.37%, employment growth by 2170 jobs a year, including 606 jobs for young people, and an annual decrease in GHG emissions by 929–1043 ktCO2eq. It is found that the most considerable benefits are received during the renovation of medium-size buildings when construction demand increases by EUR 600,000–800,000 per year and natural gas and district heating demand are reduced by EUR 59,000–187,000 per year. Other scenarios demonstrating different building renovation and energy efficiency support practices, including Costless, Reallocation of Governmental Expenditure, and Governmental Loan, show relevant but slightly lower benefits.

Household Debt, Financial Balance, and Macroeconomic Stability: An Empirical Stock‐Flow Consistent Model of the UK Economy

ABSTRACTThis paper constructs an empirical stock‐flow consistent model (SFCM) for the UK economy (UKFINMOD) based on national accounts. Unlike many macro‐econometric models that focus solely on flow variables, SFCMs emphasize the importance of national balance sheets and ensure their consistency with flow variables. Without incorporating national balance sheets, macroeconomic models cannot fully capture the general equilibrium effects in the economy or model the interactions between the real economy and financial sectors. Using the UKFINMOD, this paper provides a detailed analysis of the household sector to identify potential macroeconomic instability caused by over‐indebtedness. This study, aligned with the sectoral financial balance approach used by Godley in 1999 and Godley and Zezza in 2006, intends to identify unsustainable economic trajectories. The financial stability of households is discussed under different economic backgrounds, including the housing‐credit reinforcing cycle and the new pension scheme in the United Kingdom that allows early pension withdrawals. These findings suggest that monitoring household debt‐to‐income ratios, along with financial balances, is essential for identifying financial crises. This alternative modeling strategy should be integrated into the suite of macroeconomic models, as proposed by Blanchard in 2018.

Microeconomic Shock Propagation Through Production Networks in China

The question of whether microeconomic shocks induce aggregate fluctuations constitutes a central issue in economic research. This paper introduces a general equilibrium model with production networks to explore the propagation mechanisms of microeconomic shocks. A novel triangular production network structure is introduced, and simulations are performed using China’s input-output table to analyze the propagation of these shocks within the Chinese economy. The model demonstrates that the first-order effects of microeconomic shocks propagate downstream along the industrial chain, while the second-order effects of microeconomic productivity shocks propagate both upstream and downstream along the chain. The first-order propagation mechanism of microeconomic shocks involves changes in prices within the affected sector and its downstream sectors. Additionally, the second-order effects of microeconomic shocks rely on the reallocation of factors. The simulation results indicate that China’s production network matrix is triangular, and that the financial sector plays a crucial role in amplifying the effects of microeconomic shocks. Government should prioritize supporting upstream fundamental sectors to mitigate the adverse impacts of external shocks on economic fluctuations and to address systemic financial risks.

Measuring impacts of retirement age extension on economic growth and labor market in China using a recursively dynamic CGE model

This paper estimates the effects of retirement age extension on China’s economic growth and employment from 2020 to 2050 using a dynamic computable general equilibrium model. This paper focuses on the interaction between retirement and youth employment, particularly the substitution between young and older workers and the trade-off between male and female workers. According to the reform speed of the retirement system, nine policy scenarios are designed, which are divided into three policy options: slow, gradual, and fast reform. The simulations indicated the extension of the retirement age will indeed have a positive impact on China’s GDP growth and the optimal policy is to gradually delay the female retirement age from 50 to 60. Meanwhile, the share of women in their 30s and 50s in total labor demand is intended to increase by 2.01–2.05%, while the employment share of young and middle-aged men will decline by 1.32–1.68%.

How can optimal monetary policies reduce oil sanctions’ impacts? Evidence from Iran

Countries and international organisations have sought to impose sanctions on Iran since the nationalisation of its oil industry (1951), which have been intensified after the Iranian Revolution (1978–1979). Oil sanctions regarding exports, extraction technology and foreign financing are the most critical ones that have significantly affected Iran’s macroeconomy. The fundamental role of monetary policies in reducing the effects of oil sanctions has always been a concern for the policymakers and monetary experts in the Central Bank of Iran (CBI). Therefore, the purpose of this study is to analyse the impact of monetary policies on Iran’s macroeconomic variables against the backdrop of oil sanctions using the dynamic stochastic general equilibrium model. According to simulation results, with the severe oil sanctions but no optimal monetary policies in place, the country will face an increase in the gross domestic product, exchange rate, inflation rate, household consumption, non-oil exports, budget deficit, and seigniorage, but a decrease in oil production, household and government investment, and domestic and imported production. In the context of oil sanctions, considering the inflation and the output gap simultaneously can reduce the CBI’s losses by replacing the current monetary rule with an optimal monetary policy, especially when the inflation gap is weighted higher than the output gap.

Should Bangladesh Join RCEP? Potential Trade and Economic Effects Analysis Using Partial and General Equilibrium Model

Should Bangladesh Join RCEP? Potential Trade and Economic Effects Analysis Using Partial and General Equilibrium Model

Sectoral inflation under fragmentation of information

Abstract We examine the role of fragmentation of information in explaining the dynamics of sectoral inflation. Using the quarterly survey of firms’ prices and costs in Japan, we first document two empirical facts: the sensitivity of sectoral inflation to changes in sectoral costs monotonically decreases with the dispersion of changes in (i) current costs and (ii) those in the past. A direct application of the dispersed information model can reconcile the fact (i) but fails to reconcile the fact (ii). We then extend the standard imperfect information model to construct a dynamic general equilibrium model that features fragmentation of information, wherein a finite number of groups of firms exist and firms in the same group share common idiosyncratic noises in their signals. Using this model, we find that the degree of fragmentation of information plays a crucial role in explaining these empirical facts.

The Value and Profits of Firms

Abstract The real growth of the stock market value of firms has increased from close to 0% on average per year between 1958 and 1980, to 5.2% between 1980 and today. This change coincides with the rise of market power and profits, starting in 1980. This paper proposes to decompose the value of firms based on profits (earnings) rather than dividends. Because firms on average pay out only half of profits in dividends, dividends poorly measure firm performance. I decompose the sources of the rise of the value of all publicly traded firms into: 1. The subjective and risk-free discount factor; 2. Expected future profits; and 3. Shareholder equity (retained earnings). I find that 20% of the rise is due to the discount factor, and 80% is due to profits (half of which is retained earnings). I build a general equilibrium model of the economy where firms have market power; I perform counterfactuals and evaluate the welfare implications. The objective is to study the impact of competition policy. If market power today dropped to the level of 1980, average stock market values would be 40% lower. If market power had never increased in 1980, the average stock values would be 80% lower.

The effects of unilateral climate policy towards agriculture: A case study of Denmark

AbstractTo meet their climate policy obligations towards the EU, some EU member states will have to adopt strict climate policies towards agriculture. Responding to this need, the Danish parliament recently decided to impose a tax on greenhouse gas (GHG) emissions from the country's livestock production. We develop a simple model of primary agriculture and its interaction with the food industry to illustrate the main economic mechanisms determining the impact of a unilateral tax on GHG emissions from domestic agriculture. To study the allocation effects of the GHG tax on agriculture and the impact on the wider economy over time, we then present a disaggregated dynamic simulation model of Danish agriculture, embedded in a large‐scale computable general equilibrium model. The model predicts that a large share of the cost increase induced by the tax will be shifted forward onto higher input prices in the food industry and ultimately onto consumers via higher food prices, but landowners will also bear a significant part of the burden through a fall in land prices. The GHG tax will induce a reallocation from animal to plant production, which would be even more pronounced in the case of a livestock‐specific tax as currently foreseen, and from conventional to organic farming. This will help to reduce the total emissions from agriculture, but the largest share of the emission cuts will stem from a fall in output, as there are still few low‐cost technical abatement possibilities in agriculture.

Green finance and urban carbon emission dual control: an empirical evidence from China

The Chinese government has proposed shifting the regulation of energy consumption and intensity towards a dual control system of total carbon emissions and carbon emission intensity gradually, aiming to promote the continued role of green finance in optimizing resource allocation. To reveal the impact and mechanism of green finance on urban carbon emissions and intensity in China, this paper constructs a general equilibrium model based on endogenous growth theory and employs a two-way fixed effects model for empirical testing. The study finds that: (1) The development of green finance significantly inhibits both the total carbon emissions and carbon emission intensity of Chinese cities. (2) The impact of green finance on urban carbon emissions and intensity exhibits significant regional heterogeneity. In the northeastern regions of China, southeastern regions of the Hu Line, non-resource-based cities, and areas with higher financial efficiency, green finance can significantly reduce both urban carbon emissions and carbon emission intensity. However, in central and western regions and resource-based cities, green finance only suppresses urban carbon emission intensity. (3) Green finance can reduce urban carbon emissions and intensity through two channels: economic scale expansion and technological advancement, while the channel of industrial structure optimization has not yet shown a significant effect. Through research, it can be found that balancing the differences in green finance and carbon emission functions across regions, while fully optimizing the use and allocation mechanisms of resource elements from aspects such as technological innovation, environmental protection, and energy conservation, can enhance the quality and efficiency of economic development. This is of significant importance for green finance in promoting the realization of dual carbon control.

General theory of equilibrium in models with complementarities

General theory of equilibrium in models with complementarities

Analyzing Environmental Impact of Energy Audits in Iran Using a Computable General Equilibrium Approach

Analyzing Environmental Impact of Energy Audits in Iran Using a Computable General Equilibrium Approach

Analyzing Wealth Distribution Effects of Artificial Intelligence: A Dynamic Stochastic General Equilibrium Approach

Analyzing Wealth Distribution Effects of Artificial Intelligence: A Dynamic Stochastic General Equilibrium Approach

Inflation dynamics and the role of domestic factors

The observed inflation differentials across euro area countries, along with the divergence between the Harmonised Index of Consumer Prices (HICP) and GDP deflator trends within countries, highlight the potential role of country-specific institutional and structural characteristics in shaping inflation dynamics in response to import price shocks. This paper investigates the role of domestic factors in shaping inflationary dynamics. It employs a Dynamic Stochastic General Equilibrium (DSGE) model to examine the macroeconomic effects of a temporary import price shock under varying degrees of real wage rigidity in the labour market. The results indicate that economies with high degrees of real wage rigidity are likely to experience higher and more persistent inflationary pressures than economies with low degrees of real wage rigidity. Real wage rigidities constrain firms from absorbing part of the higher import costs through reductions in labour costs, thus resulting in greater pass-through of input costs to final prices, which in turn generates strong and persistent inflation and adversely affects employment and output. In contrast, in economies with low real wage rigidities firms have more flexibility in managing rising import costs, thereby mitigating the negative impact on output. Additionally, the paper demonstrates a relatively straightforward methodology using national accounts data to explore the relationship between domestic factors and inflation dynamics. Case studies for the euro area and Greece reveal that the rise in domestic inflation since 2021 is largely associated with an increase in profits. Labour costs are also linked to inflationary pressures, though their contribution is relatively smaller than that of profits. In Greece, the increase in profits is primarily associated with the services sector, followed by the industry sector.

Unlocking code to livability: indemnificatory housing supply, fiscal decentralization, and housing prices in China

ABSTRACT By developing a multi-sector general equilibrium model, this article investigates the nonlinear relationship between indemnificatory housing supply (IHS) and housing prices in China. Utilizing panel data from 31 provinces from 2009 to 2019, we find that the overall effect of IHS on housing prices is negative at the current stage. However, as the IHS expands, this effect transitions from negative to positive, exhibiting a U-shaped relationship driven by a stable demand-shifting effect and an increasingly dominant supply-crowding-out effect. Furthermore, fiscal decentralization exhibits a nonlinear moderating effect, first strengthening and then weakening the effect of IHS on lowering housing prices. Our findings demonstrate the relationship between IHS and housing prices from a nonlinear perspective, highlight the critical role of fiscal decentralization, and provide policy insights for promoting economic growth and improving social welfare.

Neo-sustainable Growth Theory: Study of Extended HO Model to Productive Factors’ Virtual Movements

This paper aims to fill the critical gap in the existing literature, which often treats trade and sustainability as separate fields. By combining these two dimensions, it would open avenues for new policy recommendations and strategies for promoting sustainable development in an increasingly interconnected global -economy. In terms of theoretical foundations, I link economics, technology and environmental sciences, to enrich the academic discourse and provide a comprehensive framework for future studies. This provides a unique perspective between economic growth and volatility through the lens of intergenerational and international productive factors’ virtual movements. By extending the Heckscher-Ohlin theory to incorporate virtual trade and intergenerational dynamics, the findings offer a fresh theoretical framework and empirical evidence that enrich our understanding of globalization’s mechanisms. The study’s findings on the Production Possibilities Frontier (PPF) and its implications for achieving general equilibrium contribute to ongoing debates about sustainable development and economic interdependencies. The article’s innovative approach and its comprehensive analysis offer a unique foundation to addressing real-world economic challenges. More specifically, using panel data to test the positive and negative relationships between growth and volatility and the impact of productive factors’ virtual movements, I find, the Heckscher-Ohlin theory extended to the virtual movements of factors between countries and between generations is not only empirically verified but constitutes the real foundation of sustainability. Thus, a systematic practicing of the whole set of the extended Heckscher-Ohlin theory’s full set of hypotheses as a nation’s social laws and policies or strategies, is necessarily leading to sustainable development locally and globally.