In this paper we present a computable general equilibrium model (G-RDEM), specifically designed for the generation of long run scenarios of economic development, featuring a non-homothetic demand system, endogenous saving rates, differentiated industrial productivity growth, interest payments on foreign debt and time-varying input-output coefficients. To the best of our knowledge, this is the first model of this kind. We illustrate how parameters of the five modules of structural change have been estimated, and we test the model by comparing its results with those obtained by a more conventional recursive dynamic CGE model. Both models are driven by the same GDP and population data, exogenously provided by the IPCC Shared Socio-economic Pathway 3. GDP levels determine the endogenous productivity parameters. Population affects the definition of per capita income, which in turn affects the household demand system and the variation of input-output coefficients. Information on the demographic structure is also employed to modify the aggregate saving rate parameters. It is found that the two models do produce different findings, both globally and at the regional and industrial level. Understanding the origins of such differences sheds some light on how mechanisms of structural change operate in the long run.
{"title":"Exploring Long Run Structural Change with a Dynamic General Equilibrium Model","authors":"W. Britz, R. Roson","doi":"10.2139/ssrn.3184110","DOIUrl":"https://doi.org/10.2139/ssrn.3184110","url":null,"abstract":"In this paper we present a computable general equilibrium model (G-RDEM), specifically designed for the generation of long run scenarios of economic development, featuring a non-homothetic demand system, endogenous saving rates, differentiated industrial productivity growth, interest payments on foreign debt and time-varying input-output coefficients. To the best of our knowledge, this is the first model of this kind. We illustrate how parameters of the five modules of structural change have been estimated, and we test the model by comparing its results with those obtained by a more conventional recursive dynamic CGE model. Both models are driven by the same GDP and population data, exogenously provided by the IPCC Shared Socio-economic Pathway 3. GDP levels determine the endogenous productivity parameters. Population affects the definition of per capita income, which in turn affects the household demand system and the variation of input-output coefficients. Information on the demographic structure is also employed to modify the aggregate saving rate parameters. It is found that the two models do produce different findings, both globally and at the regional and industrial level. Understanding the origins of such differences sheds some light on how mechanisms of structural change operate in the long run.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"113962424","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper proposes a novel approach to introduce time-variation in structural parameters of DSGE models. Structural parameters are allowed to evolve over time via an observation-driven updating equation. The estimation of the resulting DSGE model can be easily performed by maximum likelihood without the need of time-consuming simulation-based methods. An application to a DSGE model with time varying volatility for structural shocks is presented. The results indicate a significant improvement in forecasting performance.
{"title":"DSGE Models with Observation-Driven Time-Varying Parameters","authors":"Giovanni Angelini, P. Gorgi","doi":"10.2139/ssrn.3152822","DOIUrl":"https://doi.org/10.2139/ssrn.3152822","url":null,"abstract":"This paper proposes a novel approach to introduce time-variation in structural parameters of DSGE models. Structural parameters are allowed to evolve over time via an observation-driven updating equation. The estimation of the resulting DSGE model can be easily performed by maximum likelihood without the need of time-consuming simulation-based methods. An application to a DSGE model with time varying volatility for structural shocks is presented. The results indicate a significant improvement in forecasting performance.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-12-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129616479","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we analyze changes in the Federal Reserve behavior and objectives since the 1960s justified by potentially evolving beliefs — through a real-time learning process — about the structure of the economy and shifts in policymakers preferences in the late 1970s. In addition, we allow for changes in the volatility of the structural shocks in a medium scale Markov-switching DSGE model. We evaluate the relative contribution of each narrative to the explanation of the Great Inflation and the Great Moderation. We argue that the interplay between central bank learning and a shift in policy makers’ preferences explains movements in the monetary instrument, and regulates equilibrium determinacy in the economy. We find evidence of “bad” policy consistent with equilibrium indeterminacy during the 1970s and “good” policy during the Great Moderation. In addition, the model captures non-policy related high volatility periods clustered around the late 1960’s through the 1970s, specifically supply side shocks that behaved as destabilizing forces driving macroeconomic fluctuations. To conclude, we observe that a change in monetary policy objectives, assumptions about policymakers’ learning process, and Markov-switching volatility are key to fit the model to the U.S. post-war data.
{"title":"Bad Luck, Bad Policy, and Learning? A Markov-Switching Approach to Understanding Postwar U.S. Macroeconomic Dynamics","authors":"Gabriela Best, Joonyoung Hur","doi":"10.2139/ssrn.2803020","DOIUrl":"https://doi.org/10.2139/ssrn.2803020","url":null,"abstract":"In this paper we analyze changes in the Federal Reserve behavior and objectives since the 1960s justified by potentially evolving beliefs — through a real-time learning process — about the structure of the economy and shifts in policymakers preferences in the late 1970s. In addition, we allow for changes in the volatility of the structural shocks in a medium scale Markov-switching DSGE model. We evaluate the relative contribution of each narrative to the explanation of the Great Inflation and the Great Moderation. We argue that the interplay between central bank learning and a shift in policy makers’ preferences explains movements in the monetary instrument, and regulates equilibrium determinacy in the economy. We find evidence of “bad” policy consistent with equilibrium indeterminacy during the 1970s and “good” policy during the Great Moderation. In addition, the model captures non-policy related high volatility periods clustered around the late 1960’s through the 1970s, specifically supply side shocks that behaved as destabilizing forces driving macroeconomic fluctuations. To conclude, we observe that a change in monetary policy objectives, assumptions about policymakers’ learning process, and Markov-switching volatility are key to fit the model to the U.S. post-war data.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126971037","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2017-05-31DOI: 10.1142/S2010007818400110
Warwick McKibbin, A. Morris, P. Wilcoxen, Weifeng Liu
This paper examines carbon tax design options in the United States using an intertemporal computable general equilibrium model of the world economy called G-Cubed. Four policy scenarios explore two overarching issues: (1) the effects of a carbon tax under alternative assumptions about the use of the resulting revenue, and (2) the effects of a system of import charges on carbon-intensive goods (“border carbon adjustments”).
{"title":"The Role of Border Carbon Adjustments in a US Carbon Tax","authors":"Warwick McKibbin, A. Morris, P. Wilcoxen, Weifeng Liu","doi":"10.1142/S2010007818400110","DOIUrl":"https://doi.org/10.1142/S2010007818400110","url":null,"abstract":"This paper examines carbon tax design options in the United States using an intertemporal computable general equilibrium model of the world economy called G-Cubed. Four policy scenarios explore two overarching issues: (1) the effects of a carbon tax under alternative assumptions about the use of the resulting revenue, and (2) the effects of a system of import charges on carbon-intensive goods (“border carbon adjustments”).","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133747633","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Technical change in key OECD countries since 1990 is examined in terms of its contributions to total factor productivity and to factor bias. The dependence of real income and inequality on changes in factor abundance, total factor productivity, factor bias, the relative cost of capital goods and the progressivity of the tax system are quantified using an elemental general equilibrium model with three households. For the US, changes in factor bias are shown to have been responsible to the great majority of the observed increase in inequality between 1990 and 2008. The widely anticipated further twist away from low-skill labour is then examined, with downward rigidity of low-skill wages and transfers that sustain low-skill welfare, the increments to which are financed either from capital income or consumption taxes. The potential is identified for unemployment, or “subsidised leisure”, to rise to extraordinarily high levels, with Pareto improving gains requiring that the technology twist accompanies substantial increases in total factor productivity.
{"title":"Automation and Inequality with Taxes and Transfers","authors":"R. Tyers, Yixiao Zhou","doi":"10.2139/ssrn.3068474","DOIUrl":"https://doi.org/10.2139/ssrn.3068474","url":null,"abstract":"Technical change in key OECD countries since 1990 is examined in terms of its contributions to total factor productivity and to factor bias. The dependence of real income and inequality on changes in factor abundance, total factor productivity, factor bias, the relative cost of capital goods and the progressivity of the tax system are quantified using an elemental general equilibrium model with three households. For the US, changes in factor bias are shown to have been responsible to the great majority of the observed increase in inequality between 1990 and 2008. The widely anticipated further twist away from low-skill labour is then examined, with downward rigidity of low-skill wages and transfers that sustain low-skill welfare, the increments to which are financed either from capital income or consumption taxes. The potential is identified for unemployment, or “subsidised leisure”, to rise to extraordinarily high levels, with Pareto improving gains requiring that the technology twist accompanies substantial increases in total factor productivity.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130752157","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study optimal transport networks in spatial equilibrium. We develop a framework consisting of a neoclassical trade model with labor mobility in which locations are arranged on a graph. Goods must be shipped through linked locations, and transport costs depend on congestion and on the infrastructure in each link, giving rise to an optimal transport problem in general equilibrium. The optimal transport network is the solution to a social planner's problem of building infrastructure in each link. We provide conditions such that this problem is globally convex, guaranteeing its numerical tractability. We also study cases with increasing returns to transport technologies in which global convexity fails. We apply the framework to assess optimal investments and inefficiencies in the road networks of European countries.
{"title":"Optimal Transport Networks in Spatial Equilibrium","authors":"Pablo D. Fajgelbaum, E. Schaal","doi":"10.3386/W23200","DOIUrl":"https://doi.org/10.3386/W23200","url":null,"abstract":"We study optimal transport networks in spatial equilibrium. We develop a framework consisting of a neoclassical trade model with labor mobility in which locations are arranged on a graph. Goods must be shipped through linked locations, and transport costs depend on congestion and on the infrastructure in each link, giving rise to an optimal transport problem in general equilibrium. The optimal transport network is the solution to a social planner's problem of building infrastructure in each link. We provide conditions such that this problem is globally convex, guaranteeing its numerical tractability. We also study cases with increasing returns to transport technologies in which global convexity fails. We apply the framework to assess optimal investments and inefficiencies in the road networks of European countries.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"384 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127389643","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we extend an existing computable general equilibrium (CGE) model to perform optimal policy design exercises. Specifically, to an otherwise standard CGE model, we add an objective function that allows us to compute optimal values for selected policy variables. In turn, the CGE model operates as the constraint of the optimization problem. In addition, we illustrate the usefulness of the proposed approach to optimal policy design. For this purpose, we develop an exercise with real data from Argentina.
{"title":"Optimal Policy Design: A CGE Approach","authors":"M. Cicowiez, B. Decaluwé, M. Nabli","doi":"10.2139/ssrn.3163704","DOIUrl":"https://doi.org/10.2139/ssrn.3163704","url":null,"abstract":"In this paper we extend an existing computable general equilibrium (CGE) model to perform optimal policy design exercises. Specifically, to an otherwise standard CGE model, we add an objective function that allows us to compute optimal values for selected policy variables. In turn, the CGE model operates as the constraint of the optimization problem. In addition, we illustrate the usefulness of the proposed approach to optimal policy design. For this purpose, we develop an exercise with real data from Argentina.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114460863","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper introduces the social accounting matrix, SAM, and treats the conversion of the SAM into an economy wide model that employs fixed relative prices and clears market imbalances via flexible quantities. The paper reviews multiplier results relating to the trade-off between economic growth and income distribution for ten developing countries. It then continues with decomposing these multipliers in various effects, identifying sector and institutional gainers and losers, and highlighting the significance of dual structures in production (formal and informal sectors) and earnings (poor and rich household groups) in generating interdependent patterns of growth and distribution.
{"title":"Growth and Distribution Analysis in SAM Models: Developing Countries","authors":"S. Cohen","doi":"10.2139/ssrn.2739303","DOIUrl":"https://doi.org/10.2139/ssrn.2739303","url":null,"abstract":"The paper introduces the social accounting matrix, SAM, and treats the conversion of the SAM into an economy wide model that employs fixed relative prices and clears market imbalances via flexible quantities. The paper reviews multiplier results relating to the trade-off between economic growth and income distribution for ten developing countries. It then continues with decomposing these multipliers in various effects, identifying sector and institutional gainers and losers, and highlighting the significance of dual structures in production (formal and informal sectors) and earnings (poor and rich household groups) in generating interdependent patterns of growth and distribution.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-02-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131497805","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the redistributive e¤ects of a disinflation experiment in an otherwise standard medium-scale DSGE model augmented for Limited Asset Market Participation, implying that a fraction of households do not hold any wealth. We highlight two key mechanisms driving consumption and income distribution: i) the cash in advance constraint on firms working capital needs; ii) the response of profit margins to disinflation, which is crucially dependent on the two most used pricing assumptions in the New-Keynesian literature, i.e. Calvo vs Rotemberg. Results show that disinflation softens the cash in advance constraint and raises the real wage in steady state. This, in turn, lowers inequality. While under the Calvo formalism this e¤ect is reinforced by the fall of price markups, under Rotemberg it is more than compensated by the increase of price markups and, therefore, the opposite result obtains.
{"title":"Disinflation and Inequality in a DSGE Monetary Model: A Welfare Analysis","authors":"M. Ferrara, P. Tirelli","doi":"10.2139/ssrn.2636696","DOIUrl":"https://doi.org/10.2139/ssrn.2636696","url":null,"abstract":"We investigate the redistributive e¤ects of a disinflation experiment in an otherwise standard medium-scale DSGE model augmented for Limited Asset Market Participation, implying that a fraction of households do not hold any wealth. We highlight two key mechanisms driving consumption and income distribution: i) the cash in advance constraint on firms working capital needs; ii) the response of profit margins to disinflation, which is crucially dependent on the two most used pricing assumptions in the New-Keynesian literature, i.e. Calvo vs Rotemberg. Results show that disinflation softens the cash in advance constraint and raises the real wage in steady state. This, in turn, lowers inequality. While under the Calvo formalism this e¤ect is reinforced by the fall of price markups, under Rotemberg it is more than compensated by the increase of price markups and, therefore, the opposite result obtains.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-07-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131348902","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2012-05-01DOI: 10.1111/j.1468-0106.2012.00580.x
Y. Hirose, Takushi Kurozumi
The observed decline in the relative price of investment goods in Japan suggests the existence of investment-speci…c technological (IST) changes. This paper examines whether IST changes are a major source of business ‡uctuations in Japan, by estimating a dynamic stochastic general equilibrium model with Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output ‡uctuations. We also demonstrate that investment ‡uctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as …nancial intermediation costs. We then …nd that the estimated investment adjustment cost shocks correlate strongly with the diusion index of …rms'…nancial position in the Tankan (Short-term Economic Survey of Enterprises in Japan). We thus argue that the large decline in investment growth in the early 1990s is due to an increase in investment adjustment costs stemming from …rms'tight …nancial constraint after the collapse of Japan's asset price bubble.
{"title":"Do Investment‐Specific Technological Changes Matter for Business Fluctuations? Evidence from Japan","authors":"Y. Hirose, Takushi Kurozumi","doi":"10.1111/j.1468-0106.2012.00580.x","DOIUrl":"https://doi.org/10.1111/j.1468-0106.2012.00580.x","url":null,"abstract":"The observed decline in the relative price of investment goods in Japan suggests the existence of investment-speci…c technological (IST) changes. This paper examines whether IST changes are a major source of business ‡uctuations in Japan, by estimating a dynamic stochastic general equilibrium model with Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output ‡uctuations. We also demonstrate that investment ‡uctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as …nancial intermediation costs. We then …nd that the estimated investment adjustment cost shocks correlate strongly with the diusion index of …rms'…nancial position in the Tankan (Short-term Economic Survey of Enterprises in Japan). We thus argue that the large decline in investment growth in the early 1990s is due to an increase in investment adjustment costs stemming from …rms'tight …nancial constraint after the collapse of Japan's asset price bubble.","PeriodicalId":346619,"journal":{"name":"ERN: Computable General Equilibrium Models (Topic)","volume":"71 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114719684","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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