General Equilibrium 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.

The simple analytics of the environmental Kuznets curve: a reformulation

Purpose This paper aims to review the relationship between per capita income and aggregate emission in an economy populated by rational agents. According to the environmental Kuznets curve (EKC) hypothesis, pollution–income relationship is an inverted U-shaped curve. This paper aims to derive that relationship in an endogenous way and extends the relevant literature in an important way. Design/methodology/approach This paper formulated a general equilibrium model of homogenous population with identical tastes and preferences. Production side is modelled with firms operating in a monopolistically competitive environment. The approach is modelling the economy in an analytical way so that closed form solutions can be achieved. Model simulations have also been performed to get a clear view of results. Findings This study shows that increasing returns to scale in abatement technology ceases to be a sufficient condition for the generation of the EKC hypothesis. The general equilibrium structure of the model allows studying the endogenous evolution of income, emissions and prices of the abatement goods in a unified setting. Originality/value The paper is novel and original in nature. The results are new in the literature. These results extend and generalise the previous research work in this area in an important way. The sufficient condition that is obtained in this study limits the applicability of EKC in an otherwise identical economy as used in previous literature. Therefore, this paper adds value to the ongoing research related to EKC.

Impact of Carbon Tax on Renewable Energy Development and Environmental–Economic Synergies

Global warming caused by greenhouse gas emissions has become a worldwide environmental problem, posing a great threat to human survival. As the world’s largest emitter of carbon dioxide, China has pledged to reach peak carbon emissions by no later than 2030 and carbon neutrality by 2060. It is found that a carbon tax is a powerful incentive to reduce carbon emissions and promote an energy revolution, but it may have negative socio-economic impacts. Therefore, based on China’s 2020 input–output table, this paper systematically investigates the impacts of a carbon tax on China’s economy, carbon emissions, and energy by applying a computable general equilibrium model to determine the ideal equilibrium between socio-economic and environmental objectives. Based on energy use characteristics, we subdivided the energy sector into five major sectors: coal, oil, natural gas, thermal power generation, and clean power. The results show that when the carbon emission reduction target is less than 15%, that is, when the equilibrium carbon tax price is less than 54 yuan/ton, the implementation of a carbon tax policy can significantly reduce carbon emission and fossil fuel energy consumption, while only slightly reducing economic growth rate, and can achieve the double dividend of environment and economy. Moreover, because the reduction of coal consumption has the greatest impact on reducing carbon emissions, the ad valorem tax rate on coal after the carbon tax is imposed is the highest because coal has the highest carbon emission coefficient among fossil fuels. In addition, as an emerging clean energy source, hydrogen energy is the ideal energy storage medium for achieving clean power generation in power systems. If hydrogen energy can be vigorously developed, it is expected to greatly accelerate the deep decarbonization of power, industry, transportation, construction, and other fields.

Quantitative Easing and Direct Lending in Response to the COVID‐19 Crisis

AbstractThis paper develops a dynamic general equilibrium model to study quantitative easing (QE) and direct lending to firms. QE works through three channels: expanding bank reserves raises liquidity and lowers the liquidity premium, purchasing assets withdraws risk and lowers the volatility risk premium, and the resulting economic stimulus lowers the credit risk premium. When bank reserves are higher, the liquidity premium channel is weaker, and QE is less expansionary. Direct lending is more expansionary than QE because it substitutes bank lending and mitigates the credit risk frictions associated with bank lending, while QE stimulates bank lending and worsens the frictions.

Impacts on Regional Growth and “Resource Curse” of China’s Energy Consumption “Dual Control” Policy

Accurately evaluating the effectiveness of the energy consumption “dual control” policy can effectively solve serious the current environmental pollution and promote ecological civilization. However, researchers have rarely considered the impacts on the regional “resource curse” of the energy consumption “dual control” policy. A dynamic computable general equilibrium model (CGE) was built to evaluate the impacts on the regional “resource curse” of the energy intensity control and total energy control policy. The results showed the following. (1) The energy consumption “dual control” policy changes the supply-and-demand relationship of factors and reduces the crowding-out effect of humans and capital. (2) The energy consumption “dual control” policy has restrained GDP growth, and the total output and total investment have declined. However, the impact in regions without the “resource curse” is remarkable. (3) The energy consumption “dual control” policy has a significant inhibitory effect on major pollutants and carbon emissions. (4) The energy consumption “dual control” policy has played a positive role in breaking the regional “resource curse”. The areas with a high and low “resource curse” have become smaller, and the areas without the “resource curse” have increased significantly. The following suggestions are made: (1) increase the flexibility of the “dual control” policy of energy consumption, (2) establish an energy consumption budget management system, and (3) accelerate the establishment of a carbon footprint management system.

The Labor Market and Growth Implications of Skill Distribution: A Dynamic General Equilibrium Model with Skill Heterogeneity

This paper develops a dynamic general equilibrium model which explicitly incorporates the skill distribution of heterogeneous workers. Workers are distributed heterogeneously in their individual skill level and can be endogenously sorted into different tasks using different technologies. In doing so, we study in depth the labor market and growth implications of the changes in skill distribution. Specifically, we consider two changes in the skill distribution in a given population, (i) the increased density in the upper tail (skill upgrading), and (ii) the increased density both in the lower and upper tails (skill polarization). It is shown that, though the labor market implications for individual workers are likely to be largely different and complex (skill polarization even leads to nonlinear labor market changes), both changes in the skill distribution may increase steady-state real investment and enhance growth so that all workers gain with time.

Disasters and capital accumulation: the case of Southeast Asia

ABSTRACT Countries in Southeast Asia are highly exposed to disasters and the exposure is increasing in recent years. Capital accumulation is one of the important factors as a buffer to shocks of disasters. We examine the impact of disasters on capital accumulation in selected Southeast Asian countries, using a dynamic stochastic general equilibrium (DSGE) approach. The result shows that frequent disasters lower the long-term capital stock. This paper also discusses policy measures of promoting capital accumulation and compare two policy options: i) providing subsidies to incentivize further investment; and ii) encouraging competition and concludes that a competitive environment will be critical to strengthen capital accumulation against disasters.

Speciation Controls the Kinetics of Iron Hydroxide Precipitation and Transformation at Alkaline pH.

The formation of energetically favorable and metastable mineral phases within the Fe-H2O system controls the long-term mobility of iron complexes in natural aquifers and other environmentally and industrially relevant systems. The fundamental mechanism controlling the formation of these phases has remained enigmatic. We develop a general partial equilibrium model, leveraging recent synchrotron-based data on the time evolution of solid Fe(III) hydroxides along with aqueous complexes. We combine thermodynamic considerations and particle-morphology-dependent kinetic rate equations under full consideration of the aqueous phase in disequilibrium with one or more of the forming minerals. The new model predicts the rate of amorphous 2-line ferrihydrite precipitation, dissolution, and overall transformation to crystalline goethite. It is found that the precipitation of goethite (i) occurs from solution and (ii) is limited by the comparatively slow dissolution of the first forming amorphous phase 2-line ferrihydrite. A generalized transformation mechanism further illustrates that differences in the kinetics of Fe(III) precipitation are controlled by the coordination environment of the predominant Fe(III) hydrolysis product. The framework allows modeling of other iron(bearing) phases across a broad range of aqueous phase compositions.

Evaluating the macroeconomic impact of environmental policies in New Zealand: A New Keynesian DSGE model to sustainability

This study enhances the environmental New Keynesian framework by integrating spatial spillover effects through a dynamic stochastic general equilibrium model. The simulation results reveal that while environmental regulations can lead to welfare losses, a carbon tax levy mitigates these losses more effectively than alternative approaches in New Zealand. What is surprising is the pro-cyclical nature of environmental policies. For spillovers, shocks to capital and labor tax rates substantially curtail emissions in adjacent regions. Further simulation substantiates that higher price dispersion necessitates a reduced growth rate of emissions. These conclusions compel New Zealand to explore diverse policy options for effectively decarbonizing the economy.

Should the Government Be Paying Investment Fees on $3 Trillion of Tax-Deferred Retirement Assets?

Abstract Under standard assumptions, individuals and the government are indifferent between traditional tax-deferred retirement accounts and “front-loaded” (Roth) accounts. Adding investment fees to this benchmark, individuals are still indifferent, but the government is not. We show that under weak conditions firms charge equal percent fees under both systems, yielding higher dollar fees under Traditional. We estimate that tax deferral increases demand for asset management services by $3.8 trillion, costing the government $23.4 billion in annual fees. In a general equilibrium differentiated-product model, tax deferral produces a larger asset management industry, higher taxes, and lower social welfare. (JEL G11, G23, G28, G51, H21, J32)

Asymmetrical Monetary Relations and Involuntary Unemployment in a General Equilibrium Model

Abstract This article aims to model Keynesian involuntary unemployment within the framework of Walrasian general equilibrium, incorporating an additional hypothesis: the possibility of credit restrictions by banks or financial intermediaries. Keynes’s theory of involuntary unemployment is based on the rejection of the “second classical postulate,” which leads to the idea that entrepreneurs alone decide the level of employment. This is what some Keynesians call the asymmetry of the wage relationship. The result is a restriction of Walras’ law, which no longer includes the labor market. However, the problem is that entrepreneurs themselves may find themselves constrained by financial intermediaries. If there is a second type of asymmetry, i.e., between banks/financial intermediaries and entrepreneurs, Walras’ law will be doubly restricted since it will also exclude the credit market. I set out to identify the consequences of the properties of involuntary unemployment in a general equilibrium model.

Imports and tourism expansion: A general equilibrium analysis

There is an ongoing debate within the literature about whether inbound tourism in developing countries contributes positively to national welfare. Most of the existing literature primarily relies on case studies and lacks theoretical frameworks essential for a comprehensive understanding of the role of imported intermediate inputs in tourism development. We aim to fill this gap by presenting a theoretical specific-factor general-equilibrium model of a tourism-exporting economy that incorporates both imported and non-traded intermediate goods. Our findings indicate that the extensive utilization of imported intermediate goods by the tourism industry, as well as other sectors, could potentially increase residents’ real income during a tourism boom. Additionally, our analysis reveals deviations from some standard results of the “beach disease” model. Lastly, we shed light on the complexity of the consequences of tourism expansion on income distribution, which prove to be more intricate than commonly believed. This underscores the need for a deeper understanding of the multifaceted dynamics involved in analyzing the connections between imports and tourism expansion.

Aggregated economic damages and the role of dynamic carbon tax under climate change: A dynamic general equilibrium model

A rational assessment of the aggregated economic damages and a more effective carbon tax are crucial for climate governance. However, existing studies still under-recognize the utility damages and dynamic carbon taxes. In this study, we construct a multi-regional dynamic general equilibrium model considering both production and utility damages. Then, this paper re-estimates the regional aggregated economic damages reasonably (including utility damages) and compares in detail the role of static carbon tax, dynamic carbon tax and regionally optimal dynamic carbon tax (RCT). We found that: (1) As climate change intensifies, the world will suffer >8 % of production damage and 1 % of utility damage by the end of the 21st century. Of these, the US and China face more pronounced economic damage. (2) If the carbon tax is implemented only in some regions, other regions will have a “free rider” benefit. An environmentally friendly dynamic carbon tax (fast and then slow) would be more effective, giving economies room to adapt to the carbon tax. The risk of exacerbating global inequality needs to be guarded against when using carbon tax. (3) Based on the regional social cost of carbon (R-SCC), implementing RCT is most effective for curbing climate change and achieving warming targets. This paper contributes to improving the understanding of assessing regional economic damage from climate change and recognizing the role of dynamic carbon tax.

Economy-wide impact of targeting and repurposing fossil fuel subsidies in Malaysia

Fossil fuel subsidy reform is a critical strategy for fostering cleaner energy systems and promoting sustainable development. The Malaysian government has signalled commitments to implement a targeted fuel subsidy reform where vulnerable households would be unaffected by the direct impact of higher fuel prices even after the reform. But despite this commitment, little is known about the economy-wide impact of the reform. This study employs a dynamic Computable General Equilibrium (CGE) model to examine the economic, social, and environmental impact of a targeted fuel subsidy removal in Malaysia under a spontaneous and gradual implementation scenario. The research also explores the impact of direct cash transfers to households and reinvestment in key sectors of the economy in the aftermath of the reform. Results from the study show that subsidy removal brings positive gains to the Malaysian economy in the medium to long term. Sequencing the phaseout of subsidies, providing compensation to vulnerable households, and reinvesting in education, health, transportation, and food assistance helps to avoid short-term adverse effects on households and output. The study recommends the need for a gradual removal of fuel subsidies that is accompanied by cash transfers to vulnerable households and investment in key sectors of the economy.

Economic impacts of large dams on downstream brickmaking in developing countries

Large dams have positive and negative impacts, including disrupting brickmaking on the floodplains downstream due to flow regulation and sediment reduction, affecting the supply of essential construction material, notably in developing countries. In this study, we introduce an analytical framework to assess the economywide effects of large dams on downstream brickmaking, focusing on Traditional Fired Clay Brick (TFCB). The framework includes three steps: characterizing the impacts on river flow and sediment load using river system modeling and secondary data, understanding the role of TFCB production in the economy based on survey and economic data, and quantifying the economywide impacts of changes in TFCB production using dynamic computable general equilibrium modeling. We demonstrate the functionality of the approach by conducting a case study of the impacts of the Grand Ethiopian Renaissance Dam (GERD) on the Sudanese economy due to changes in TFCB production by comparing two scenarios: “with GERD” and “no GERD.” Results show that Sudan’s accumulated (2023–2050) discounted (at 0.5% annually) Gross Domestic Product (GDP) at factor cost would decline by US$ 6 billion (−0.38%) due to a reduction in TFCB production. Consumer flexibility regarding brick types and the ability of alternative brick sources to fill the demand gap are key determinants of the impacts.

Circular vs One-Way Production Processes: Two Different Views on Production and Income Distribution

ABSTRACT This paper examines two distinct representations of production processes: circular production, where commodities function as both inputs and outputs, and one-way production, which starts with factors of production and ends with finished goods. These frameworks offer different views on profits. In circular systems, profits arise from surplus production, while in one-way systems, they appear to emerge from price differences between final goods and inputs. Using Sraffa’s price equations, we analyse the properties of both systems. We demonstrate that while one-way systems seem to allow for profit increases by raising prices, this is an illusion as it ultimately reduces real wages, the true source of profits. Additionally, we show that one-way systems become circular when real wages are fixed. Finally, the paper discusses how this distinction is important in understanding the shift from Walras’ general equilibrium theory to neo-Walrasian formulations. This study highlights the importance of circularity in the functioning of capitalist economies and its implications for the theory of distribution.

Would carbon tax policy promote real estate prices?

Real estate plays a pivotal role in carbon emissions. Carbon tax policy is a crucial measure for mitigating enterprises' carbon emissions. However, imposing a carbon tax on productive enterprises in the real estate industry to reduce emissions may increase their production costs, which could easily be passed on to buyers, thus inflating real estate prices and impeding policy effectiveness. To examine the impact and negative consequences of carbon tax policy applied to the real estate industry, we develop a dynamic stochastic general equilibrium model encompassing building materials manufacturers, real estate firms, and the environmental regulatory government. Findings indicate that implementing the carbon tax policy significantly reduces carbon emissions in the real estate industry. However, the existence of a price transmission mechanism makes carbon tax policies susceptible to driving up real estate prices. Further welfare analysis shows that increasing carbon tax rates will result in social welfare losses, allowing the government to modify and refine its policy objectives.

The Efficiency Aspect of Taxation in Pakistan: A Computable General Equilibrium Approach

The Efficiency Aspect of Taxation in Pakistan: A Computable General Equilibrium Approach

Assessing investment priorities for inclusive agricultural transformation in Tanzania

AbstractMotivationPolicy‐makers dealing with conflicting development goals and constrained budgets must comprehend the relative cost effectiveness of agricultural and rural development initiatives.PurposeWe assess the impact of alternative interventions on development outcomes—economic growth, job creation, poverty reduction, and diet quality—to inform decision‐making and resource allocation in Tanzania's agriculture. We analyse trade‐offs among development objectives and explore budget reallocation to enhance the efficiency of public spending.Approach and methodsWe used a computable general equilibrium (CGE) model linked top‐down with microsimulation modules to simulate the impact of public investment options.FindingsNo single option emerges as the most effective across all development objectives. Investments in improved inputs and extension for horticulture and cash crops stand out for diet quality and employment creation. Livestock services show consistently high rankings across multiple objectives. Investments to boost cereals and root crops promote growth and reduce poverty but do little to increase employment and diet quality.Budget reallocation towards more cost‐effective interventions can significantly enhance the development effectiveness of Tanzania's agricultural expenditures and would substantially increase cumulative gross domestic product growth between 2019 and 2028.Policy implicationsPolicy‐makers can use the findings to design and prioritize agricultural interventions that better align with broader development objectives. Tanzania can achieve higher benefits and contribute to overall development goals by reallocating resources towards more cost‐effective expenditure options.

Household Well-Being, Environment and Health in the Peripheries of the Metropolitan Area of Oaxaca City

Objective: The economy of poor urban households is analyzed using a well-being function that also considers incomes, sociodemographic characteristics (CS), housing and the environment. Theoretical structure: The dependent variable is household well-being (BF) and the explanatory variables are all incomes obtained from the market economy, as well as government transfers (TG). The CS represent resources that facilitate obtaining income; housing provides income indicators; and the environment are the physical conditions that determine the state of health. Methodology: A probabilistic survey was applied to a sample of households in four poor peripheral neighborhoods. The equations were constructed using ordinary least squares regression and the beta coefficients measure the contribution of the variables from the four categories above to the BF. The effects of these variables on health expenditure (GS) are also measured. Discoveries: The main incomes that contribute to the BF were determined and these make a contribution equivalent to that of the set of variables of the CS, housing and family businesses. Likewise, the environment and diseases increase GS. Practical and social implications: Research shows that poor peripheral urban households participate in the market economy and that an increase in average age contracts their level of BF. Originality/value: The tested model turned out to be versatile and accurate in analyzing the economies of poor urban households and has greater explanatory power than the agricultural household models and the applied general equilibrium model.