Session Two: SPECIFICATION

Transcription

1 Computable General Equilibrium (CGE) Models: A Short Course Hodjat Ghadimi Regional Research Institute Spring 2007 Session Two: SPECIFICATION

2 Session 2: Specification A taxonomy of models Components of a simple CGE Mathematical model statement

3 Review: CGE Keywords Multisectoral Nonlinear Economy-wide Autonomous decision making Walrasian competitive equilibrium

4 Structure of a CGE model Circular Flow of Income FACTOR PAYMENTS FACTOR MARKET PAYMENTS TO CAPITAL AND LABOR OIL REVENUES INDIRECT TAXES INTERMEDIATE INPUTS GOVERNMENT INCOME TAX PRODUCERS DEPRECIATION HOUSEHOLD INVESTMENTS CAPITAL MARKET GOV. SAVINGS PRIVATE SAVINGS PAYMENTS TO GOODS & SERVICES PRODUCT MARKET GOV. CONSUMPTION CONSUMPTION FOREIGN SAVINGS IMPORTS EXPORTS REST OF THE WORLD

5 A taxonomy of models

6 A taxonomy of models Models and Policy Analysis Policy makers intend to change the way the economy operates, rather than just understand it Policy analysis: explain the links between instruments and targets Model-building: the process of abstraction and generalization required to provide structure to our empirical observation

7 A taxonomy of models Economic Models Analytic models Stylized numerical models Applied models

8 A taxonomy of models Complex Real World Conceptual Model (Stylized facts) Analytical Model Stylized Model Applied Model Apply theoretical framework & statistical methods to filter out inessential details Focus on important assumptions &causal mechanisms Attach numbers to the variables & relate them to economic performance Include more details, more specific

9 A taxonomy of models Complex Real World Conceptual Model (Stylized facts) Analytical Model Description of reality Stylized Model Strategic Policy Analysis Applied Model Detailed Policy Analysis

10 A taxonomy of models Analytic models Cast economic relationships into a form susceptible to mathematical analysis Explore the implications of various sets of postulates Deliberately simplified to focus on important assumptions and causal mechanisms Empirical realism not an important criterion

11 A taxonomy of models Stylized numerical models Attach numbers to the variables and relate them to economic statistics Larger, more complex & more realistic Used to analyze problems too difficult to solve analytically Empirical, able to explore the size of various effects Give up simplicity to gain in applicability & generality

12 A taxonomy of models Applied models Include broader range of stylized facts More specific and narrow in application Include more institutional details Additional details may obscure the major causal mechanisms without adding any empirically significant effects

13 A taxonomy of models CGE models fall into both stylized and applied categories In addition CGE models: Have strong links with basic economic theory Work by simulating the interaction of various actors as specified in neoclassical general- equilibrium theory Derive behavior based on optimization as specified in micro-theory Are fully closed in that the supply and demand sides of all markets are specified

14 Components of a simple CGE See a SAM structure

15 123 Model Graphical Analysis Equations of an applied model

16 Model Capture mechanisms by which external shocks and domestic policies ripple through the economy Many problems (and solutions) are related to links between external sectors and domestic economy Based on: Devarajan-Go Go-Lewis-Ronbinson- Sinko (1997)

17 Model 1 country, 2 activities, 3 commodities 2 activities, producing D and E. E not consumed domestically. Additional commodity, M, consumed domestically but not produced.

18 Model Very simplistic stylized model, but: Mechanisms are transparent Can be solved graphically, analytically, or with Excel Behavior is similar to that of more complex models

19 Model Aggregate GDP (X) is fixed. Full employment model. Trade balance set exogenously. World prices of M and E are fixed. Total absorption (Q) is endogenous.

20 Flows Basic CGE Model ( S ) 1. X = G E, D ; Ω ( D σ ) S 2. Q = F M, D ; D Y 3. Q = q P E 4. = g2 P, P S D M 5. = 2, D f P P D x 6. Y = P X + R B ( e d) ( m d) Prices ( ) 9. P = g P, P x e d 1 ( ) 10. P = f P, P q m d R 1 Equilibrium Conditions D S 12. D D = 0 D S 13. Q Q = P P m e = = R pw R pw m e pw M pw E B e m =

21 Basic CGE Model Identities x e d S P X P E+ P D q S m d D P Q P M + P D q Y P Q D

22 Basic CGE Model Endogenous Variables E: Export good M: Import good D S : Supply of domestic good D D : Demand for domestic good Q S : Supply of composite good Q D : Demand for composite good Y: Total income P e : Domestic price of export good P m : Domestic price of import good P d : Domestic price of domestic good P x : Price of aggregate output P q : Price of composite good R: Exchange rate Exogenous Variables pw e : world price of export good pw m : world price of import good B: Balance of trade σ: : Import substitution elasticity Ω: : Export transformation elasticity

23 SAM for Model Activities Commod Hshld World Activities d P D D e P E Commodities q P D Q Households x P X RB World m P M Total d P S e D + P E q S P Q Y

24 E E/D = k (P E / P D ) Ω P E = R pwe PD /PE D

25 M/D = k (Pk D / P M ) σ M P M = R pwmr PD /PM D

26 Programming Model ( σ ) Maximize Q= F M, D; D with respect to: M, E, D, D subject to: ( ) x λ Shadow Prices 1. G E, D ; Ω X technology = P / P 2. S S x q pw M pw E + B balance of trade λ = R / P m e b q 3. D D domestic market λ = P / P D S d d q

27 1-2-3 Model P D /P M M P M M=P E E D E D P D /P E

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30 CGE Model with Consumption, Government, and Investment Shantayanan Devarajan Delfin S. Go Jeffrey D. Lewis Sherman Robinson Pekka Sinko

31 CGE Model Real Flows ( S ) 1. X = G E, D ; Ω ( D σ ) S 2. Q = F M, D ; 3. D Q = C+ Z + G E 4. = g2 P, P S D M 5. = 2, D f P P D ( e d) ( m d)

32 CGE Model m m T t R pw M = + t + t + q q D y P Q Y e e t P E x q Y P X tr P re R = + + S = s Y + R B+ S ( y) t 9. CP = 1 s t Y g

33 CGE Model Prices ( ) 10. P = 1+ t R pw ( ) 11. P 1+ t = R pw ( ) 12. P = 1+ t P ( ) 13. P = g P, P x e d 1 ( ) 14. P = f P, P 15. R 1 m m m e e e t q q q m d 1

34 CGE Model Equilibrium Conditions D S 16. D D = 0 D S 17. Q Q = m e pw M pw E ft re B = t 19. P Z S = 0 q q g 20. T P G tr P + ft R S = 0

35 CGE Model Identities x e d S P X P E+ P D q S m d D P Q P M + P D

36 Endogenous Variables E: Export good M: Import good D S : Supply of domestic good D D : Demand for domestic good Q S : Supply of composite good Q D : Demand for composite good P e : Domestic price of export good P m : Domestic price of import good P d : Domestic price of domestic good P x : Price of aggregate output P q : Price of composite good P t : Sale price of composite good R: Exchange rate T: Tax revenue S g : Government savings Y: Total income C: Aggregate consumption S: Aggregate savings Z: Aggregate real investment Exogenous Variables pw e : world price of export good pw m : world price of import good t m : Tariff rate t x : Export tax rate t q : Sales tax rate t y : Direct tax rate tr: Government transfers (real) ft: Foreign transfers to government re: Foreign remittances to private sector s: Average savings rate X: Aggregate output (GDP) G: Real government demand B: Balance of trade σ: Import substitution elasticity Ω: Export transformation elasticity

37 IRAN CGE

38 Structure of a CGE model Signals: prices in a market economy K (R) COBB-DOUGLAS L (WA) RS V (PV) LEONTIEF N (PN) XD (PX) E (PE) CET XXD (PD) CES M (PM) X (P)