Table Of ContentAPPLIED GENERAL EQUILffiRIUM MODELLING
APPLIED GENERAL
EQUILIBRIUM MODELLING
Edited by
HENKDON
Central Planning Bureau, The Hague, The Netherlands
and University ofA msterdam, The Netherlands
THEO VA N DE KLUNDERT
Tilburg University, Tilburg, The Netherlands
and Central Planning Bureau, The Hague, The Netherlands
and
JARIG VAN SINDEREN
Ministry ofE conomic Affairs,
The Hague, The Netherlands
Reprinted from De Economist, Volume 139, Nr. 2, Spring, 1991
....
"
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication Data
Applied general equilibrium model ling I edited by Henk Dan. Theo van
de Klundert. Jarig van Sinderen.
p. cm.
"Drlginally written as papers for the Symposium an Applied General
Equl1ibrium Modelling for Open Economies. which was held in
Noordwljk INetherlandsl in December 1989"--Pref.
ISBN 978-94-015-7910-0 ISBN 978-94-015-7908-7 (eBook)
DOI 10.1007/978-94-015-7908-7
1. Equi librlum (Economicsl--Mathematical models--Congresses.
1. Dan. Henk. II. Klunaert. Theo van de. III. Slnderen. Jarlg van.
IV. Sypmposium an Appl ied General Equilibrium Modelling for Open
Economies 11989 Noordwijk. Netherlandsl
H8145.A67 1991
339.5·OI·5118--dc20 91-27396
ISBN 978-94-015-7910-0
Printed on acid-free paper
AII Rights Reserved
© 1991 Springer Science+Business Media New York
Originally published by Stenfert Kroese, Leiden in 1991
Softcover reprint of the hardcover 1s t edition 1991
No part of the material protected by this copyright notice may be reproduced or
utilized in any form or by any means, electronic Of. mechanical,
inc\uding photocopying, recording or by any information storage and
retrieval system, without written permission from the copyright owner.
Contents
Preface vii
About the authors and editors ix
Part I. Introduction
I. Introduction
by F.W. Rutten
Part II. Tax Reform and Capital
2. Applications of General Equilibrium Models to the 1986 Tax Reform Act in the United
States
by Y.K. Henderson 7
3. Tax Reform, Capital Allocation and Welfare Gains in Norway
by E. Offerdal 29
Part III. Intertemporal Aspects and Expectations
4. Introducing Intertemporal and Open Economy Features in Applied General Equilibrium
Models
by A.L. Bovenberg and L.H. Goulder 47
5. On the Approximation of Infinite Horizon Allocations
by M.A. Keyzer 65
Part IV. Taxes and the Labour Market
6. Towards an Analysis of Tax Effects on Labour Market and Allocation. A Micro/Macro
Approach
by G.M.M. Gelauff. FA.M. van Elp, JJ. Graafland, A.E. van Hien and A.GH. Nib-
belink 105
7. The Effects on Unemployment of Reducing Social Security Contributions: A General
Equilibrium Analysis for Belgium
by C. Dewatripont, S. Ehrlich, V. Ginsburgh and D. van Regemorter 135
8. Excess Demand in the Keller Model
by O.J.c. Cornielje and C. Zeelenberg 155
Discussions 175
Preface
Over the last decade or so, applied general equilibrium models have rapidly become
a major tool for policy advice on issues regarding allocation and efficiency, most
notably taxes and tariffs. This reflects the power of the general equilibrium
approach to allocative questions and the capability of today's applied models to
come up with realistic answers. However, it by no means implies that the theoretical,
practical and empirical problems faced by researchers in applied modelling have all
been solved in a satisfactory way. Rather, a promising field of research has been
opened up, inviting theorists and practitioners to further explore and exploit its
potential.
The state of the art in applied general equilibrium modelling is reflected in this
volume. The introductory Chapter (Part I) evaluates the use of economic modelling
to address policy questions, and discusses the advantages and disadvantages of
applied general equilibrium models. Three substantive issues are dealt with in
Chapters 2-8: Tax Reform and Capital (Part II), Intertemporal Aspects and
Expectations (Part III), and Taxes and the Labour Market (Part IV). While all parts
contain results relevant for economic policy, it is clear that theory and applications
for these areas are in different stages of development. We hope that this book will
bring inspiration, insight and information to researchers, students and policy
advisors.
The Chapters were originally written as papers for the Symposium on Applied
General Equilibrium Modelling for Open Economies, which was held in Noordwijk
(Netherlands) in December 1989. They were also published in a Special Issue of De
Economist, Spring 1991. For this book, we have added reports on the discussions
vii
viii
that followed the presentation of the papers at the Symposium. Because several
comments made in the discussions were subsequently incorporated into the revised
versions of the papers, the reports have been editedl to fit with the text of the
Chapters. Therefore the editors, not the discussants, should be blamed if some
comments appear to be misdirected.
This book would not have been possible without the kind cooperation of the editors
and publisher of De Economist, and the logistic and financial support of the Central
Planning Bureau and the Ministry of Economic Affairs in The Hague. The reports
on the Symposium discussions draw heavily on the work of the rapporteurs Nick
Draper, Cees Folmer, 10han Graafland, Berend Hasselman, Yvette lurriens, Fred
Krapels, Rob Mulder and Ruud Okker. Also the referees of De Economist, the
discussants and the other participants of the Symposium contributed to the quality
of this book. Last but not least we are indebted to the authors for their original
contributions and their efforts to revise and proofread the papers for publication.
The Editors
1 Mainly by eliminating all comments that no longer applied to the revised papers. In the
process, we lost all comments on Chapter 3, which underwent major revisions since the
Symposium version.
About the authors and editors
A Lans Bovenberg is an economist at the International Monetary Fund. He is
currently on leave at the economic policy unit of the Ministry of Economic Mfairs
of the Netherlands in the Hague. He also holds a vlSltmg professorship at the
Erasmus University, Rotterdam. He specializes in fiscal policy and applied
macroeconomic theory.
Olaf J.e. Cornielje is a senior policy advisor for general economic Issues at the
Dutch Ministry of Social Mfairs and Employment. His interests are applied general
equilibrium modelling with a focus on taxation and disequilibrium issues.
e. Dewatripont is research assistant at the Centre d'Economie Mathematique et
d'Econometrie (CEME), Universite Libre de Bruxelles.
F.J.Henk Don is deputy director of the Central Planning Bureau in The Hague and
professor of economics at the University of Amsterdam. He works in applied
modelling and policy analysis.
S. Erlich is researcher at the Departement d'Economie Appliquee (DULBEA),
Universite Libre de Bruxelles. His research areas are applied modelling and
mathematical programming.
Frank AM. van Erp is researcher at the Central Planning Bureau in The Hague.
Since February 1990 he is with the International Research Division and works on
the CPB world model with a focus on international linkages and the demand side.
George M.M. Gelauff is head of the Applied General Equilibrium Division of the
Central Planning Bureau in The Hague. He works on an AGE model for the
Netherlands, with an emphasis on the influence of taxation and social security on
labour market performance and growth.
V. Ginsburgh is professor of economics at the Centre d'Economie Mathematique et
d'Econometrie (CEME), Universite Libre de Bruxelles. His research areas cover
industrial economics, applied general equilibrium and the economics of arts.
Lawrence H. Goulder is visiting associate professor of economics at Stanford
University. His research focuses on issues in taxation and environmental policy. His
work often involves the development of dynamic general equilibrium models to
examine these issues.
IX
x
Johan J. Graafland is researcher at the Applied General Equilibrium Division of the
Central Planning Bureau in The Hague. He works on applied modelling with a
focus on labour market theory.
Yolanda K. Henderson is an economist at the Federal Reserve Bank of Boston
(USA) where she specializes in public finance and regional economics. Dr.
Henderson also is an affiliate of the National Bureau of Economic Research.
Adriaan E. van Hien is statistical assistant at the Central Planning Bureau in The
Hague. At present he is with the Monetary Analysis Division working on the
management and analysis of financial data.
M.A Keyzer is deputy director of the Centre for World Food Studies at the Vrije
Universiteit in Amsterdam. He specializes in applied general equilibrium modelling
with emphasis on developing countries.
Theo C.M.J. van de Klundert is professor of economics at Tilburg University and
scientific advisor to the Central Planning Bureau. He specializes in macroeconomic
theory and modelling.
Andre G.H. Nibbelink is statistical assistant at the Applied General Equilibrium
Division of the Central Planning Bureau in The Hague. He is charged with data
management and computational support.
Erik Offerdal worked at the Central Bureau of Statistics in Norway when his paper
was written. He has since joined the International Monetary Fund, and the views
expressed here should not be construed as those of the Fund. He currently works
on tax policy issues in former socialist countries in Eastern Europe.
D. Van Regemorter is research assistant at the Centrum voor Economische Studies
(CES), Katholieke Universiteit Leuven. Her research interests are applied modelling
related to energy studies and environmental issues.
Frans W. Rutten is Chairman of the Scientific Council for Government Policy and
Professor of Macroeconomic Policy at the Erasmus University, Rotterdam.
Jarig van Sinderen is head of the research unit and deputy director of the
directorate for economic policy of the Ministry of Economic Affairs in The Hague.
He works in applied modelling with a focus on tax issues.
Kees Zeelenberg is senior economist in the Department of Statistical Methods at
the Netherlands Central Bureau of Statistics in Voorburg. He works in general
equilibrium analysis and applied microeconomics.
INTRODUCTION
BY
F.W. RUTTEN"
In recent years, general equilibrium modelling has become a very active and
promising research area in economics. Therefore, I think it is important that,
in December 1989, the Dutch Central Planning Bureau and the Dutch Ministry
of Economic Affairs organized an international symposium on this subject, in
which - I am glad to say - many prominent model builders decided to par
ticipate. This Special Issue of De Economist contains the papers that were
presented there. In this introduction, I I will not try to go into any detail on ap
plied general eqUilibrium model building. Instead I would like to make a few
general remarks, leaving the 'real work' to the specialists in this field. I will
devote a few words to the role of economic modelling in the recent past, the
present and the future.
Four years ago, it was exactly 50 years since Jan Tinberge!1 published his
famous 24-equation model of the Dutch economy. As we know, this was the
very first macroeconometric model ever built. In order to celebrate this an
niversary, a 3-day conference was held in 1987 in Amsterdam.2 Excellent
model builders from all over the world discussed the key question of this con
ference, namely: will macroeconomic model building remain an intellectual
challenge for the future? Despite the fact that efforts have been made to show
how existing macroeconomic models could be improved, this conference did
not change my feeling that the traditional macroeconomic models have lost
their monopoly position in the field of policy analysis. In the US this process
of change has gone very far, if not too far. To illustrate this, I quote some
remarks by Mankiw in the Journal of Money, Credit and Banking. 3 He states
that: 'Today, macroeconomists are much less sure of their answers. At some
• Chairman of the Scientific Council for Government Policy, The Hague, The Netherlands.
I This introduction is based on my opening address to the symposium.
2 The conference papers and the reports of the discussions have been collected in W. Driehuis,
M.M.G. Fase and H. den Hartog, Challenges Jor Macroeconomic Modelling, Amsterdam, 1988.
3 N.G. Mankiw, 'Recent Developments in Macroeconomics: A Quick Refresher Course,' Jour
nal oj Money, Credit and Banking, 20 (1988), part 2, pp. 436-458.
