The New Generation of Computable General Equilibrium Models

343 Pages·2018·5.641 MB·English

by  Federico Perali, Pasquale Lucio Scandizzo

Federico Perali 
Editors
Pasquale Lucio Scandizzo
The New Generation
of Computable
General Equilibrium
Models
Modeling the Economy
The New Generation of Computable General
Equilibrium Models
Federico Perali Pasquale Lucio Scandizzo
(cid:129)
Editors
The New Generation
of Computable General
Equilibrium Models
Modeling the Economy
123
Editors
Federico Perali PasqualeLucio Scandizzo
Department ofEconomics EconomicsFoundation—CEIS
University of Verona University of RomeTor Vergata
Verona Rome
Italy Italy
ISBN978-3-319-58532-1 ISBN978-3-319-58533-8 (eBook)
https://doi.org/10.1007/978-3-319-58533-8
LibraryofCongressControlNumber:2018934402
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Preface
This book grew out of an initial collaboration between a team from the University
of Rome “Tor Vergata” and its spin-off Openeconomics srl (http://www.
openeconomics.eu), and one from the University of Verona and its spinoff
Economics Living Lab (http://econlivlab.eu). This prompted the creation of a
workinggroupandthenaworkshopwithintheAssociationofItalianDevelopment
Economists (SITESIDEAS: http://www.sitesideas.org/) in January 2017. The
workshop brought about a number of interesting papers, but more importantly,
uncovered the interest cultivated by a growing group of SITES associates, who
continuedtocollaborateandcorrespondaftertheworkshop. Somemembersofthe
group met again at the SITES Summer School in Prato in June 2017. The papers
originally presented were in part modified and some other papers were added as a
consequence offurther contacts and collaborations.
The book aims to present state-of-the-art theory and practical applications of
CGEs and social accounting matrices (SAM) focusing on recent advances and
techniques,butalsoreachingbacktobasicassumptionsandtheoreticaltenetsfora
class of models that are becoming ever more diffused as the bread and butter of
policy analysis. The focus of the models presented is on estimation and policy
impact analysis, within a pragmatic vision of the underlying economic theory that
echoesthefactthatthepracticalreasonsofmodelsuccessesresideintheircapacity
to provide consistent and credible counterfactuals to the effects produced by the
changes induced by the policies, programs and projects to be assessed.
The book is divided into 3 parts and 12 chapters. Part I, consisting of only one
chapter (Chapter “General Equilibrium Modelling: The Integration of Policy and
Project Analysis”), presents an introduction to CGE modeling, focusing on the
integration of policy and project assessment, as the frontier toward which CGEs
havebeenevolvingforthepast20years.Thechapterdiscussesthebasictheoretical
models that lay behind the CGEs and their SAM cores, with special emphasis on
the fundamental differences that emerge on their interpretation under alternative
economictheories,andassumptionsonthecause–effectrelationshypothesized.The
chapter also reasons and comments on some of the latest trends of CGE-SAM
models, and their ever-increasing extensions and applications to macro and micro
v
vi Preface
areas of economic policy, with a view to integrate the different layers of an
economy in a comprehensive structural representation.
Part II of the book presents a sample of Methodology and Estimation Issues,
concerningbothspecialproblemsofdynamicrepresentationoftheeconomicsystem
(Chapter “Demand-Driven Structural Change in Applied General Equilibrium
Models”) and estimation and modeling problems mainly related to micro-macro
integration (Chapters “Micro-Macro Simulation of Corporate Tax Reforms”
–“AnalysisofLocalEconomicImpactsUsingaVillageSocialAccountingMatrix:
The Case of Oaxaca”). This part focuses on solutions to incorporate special struc-
tural features and changes in both SAMs and CGEs, attempting to overcome the
straightjacket of the economy snapshots given by the national accounting systems.
Chapter “Demand-Driven Structural Change in Applied General Equilibrium
Models” presents new results from CGE estimates and simulations on demand-
drivenstructuralchanges,embeddedinthemodelasaneffectofchangingtastesover
time. Chapter “Micro-Macro Simulation of Corporate Tax Reforms” discusses the
potentialitiesofintegratingmicrosimulationmodelsandCGE-SAMsandpresentsa
microsimulationanalysisofarecentcorporatetaxreforminItaly.Themicromodel
simulates corporate tax liabilities according to the prevailing fiscal rules and is
updated and used on a regular basis by the Italian Central Institute of Statistics for
revenue forecasting and policy analysis. Chapter “Estimating an Energy-Social
AccountingMatrixforItaly”describestheestimateofanenergymodelforItalythat
integrates some of the information of a comprehensive technology optimization
model for energy (TIMES (The “TIMES”, Integrated MARKAL-EFOM System)
withadetailedSAM.Chapter“AnalysisofLocalEconomicImpactsUsingaVillage
Social Accounting Matrix: The Case of Oaxaca” presents the results of a research
project aimed at applying the SAM technique to small inhabited areas within a
hierarchically orderedsetofnational, regional, andlocal accounts. Theapplication
described uses national and regional statistics as well as survey methods of esti-
mation to be able to use a “local” SAM for the village of Oaxaca in Mexico. This
social accounting approach to local economic development applies to the local
economiesofthedisparateeconomicrealities ofothercontinentsand,thankstoits
easeofoperationandinterpretation,canbeusedbothasanimpactevaluationtoolfor
largeprojectsandasapolicyevaluationplatformforlocalandnationalpoliticians.
Part III of the book, Static and Dynamic CGEs and Policy Applications,
addresses the theory and the application of state-of-the-art CGEs to policy prob-
lems. These range from recent CGE applications to policy choices and investment
planning in Kenya, Italy, Mauritius (Chapter “A CGE Model for Productivity and
Investment in Kenya”–“A CGE Model for Mauritius Ocean Economy”), to
micro-macro analysis, policy reforms, Euro devaluation, and regional dynamics
(Chapter“AMicro-MacroSimulationModelAppliedtotheFrenchEconomy:The
Case of a Euro’s Real Depreciation”–“A Regional Dynamic General Equilibrium
Model with Historical Calibration: A Counterfactual Exercise”). While the case
studies reported cover a wide spectrum of methods, models, and policy questions,
theyhaveincommonafocusonspecificpolicyquestions,ratherthananattemptto
buildamodelwithspecialstructuralortime-varyingcharacteristics.Thus,whilethe
Preface vii
simulations presented are shaped by the questions asked, the models developed
present general features of their own that transcend the specific policies examined
andcanbeinterpretedinabroaderframework.Thisisthecase,forexample,ofthe
Kenya and Mauritius case studies (respectively, Chapters “A CGE Model for
Productivity and Investment in Kenya” and “A CGE Model for Mauritius Ocean
Economy”), where the analysis of possible development strategies unveils models
that can address more general questions about the role of productivity growth and
investment. On the other hand, the study assessing the impact of climate change
uses a fine spatial resolution for the European Mediterranean countries to measure
the differential impacts of both climate and physical process models such as those
describingtheallocationoflanduse,cropgrowth,andfloodriskatthelocal level.
Such an integrated approach coupled with an appropriate treatment of spatial
heterogeneityproducesinformationthatishighlyrelevanttobothplannersandthe
businesscommunity.Thepropertreatmentofheterogeneityisfundamentalnotonly
to understand differences in both behavioral responses and policy impacts across
regions, but also across aggregate family types. This is clearly shown in the study
devotedtotheexantesocio-economicevaluationoftheimpactoftheCAPreform
on Italian agriculture and the whole economy using a micro-funded general equi-
librium model that differentiates the impact at the household level and for each
interestgroupinvolvedinthepolicyprocess.Thepoliticaleconomyanalysisofthe
consequences of the reform incorporates the political positions of farmers and
agro-food industries, consumers, and unions and estimates the impact of each
scenario on each stakeholder. The policy analysis permits both an understanding
ofthepossiblesocialconflictsarisingfromtheimplementationofthereformanda
unique ranking of the policy alternatives. If the interest is in estimating the impact
of a policy change at the disaggregate household level, then an integrated
micro-macro simulation model needs to be implemented to evaluate the distribu-
tional effects as it has been implemented in the study devoted to the estimation
of the impact on the French economy of a real depreciation of the Euro. The
research finds that a 10% real depreciation of the Euro stimulates the aggregate
demand by increasing exports and reducing imports, which increases real GDP by
0.7% and reduces the unemployment rate in the economy by 2 percentage points.
At the individual level, the study reveals that the macroeconomic shock reduces
poverty and, to a lesser extent, income inequality. The regional dynamic general
equilibriummodelintroducesanovelhistoricalcalibrationtechniquebasedontwo
regional SAMs for the Italian region Valle D’Aosta for the years 1963 and 2002
that ensures that the modeled tendencies perfectly reproduce the actual observed
growth patterns. The dynamic general equilibrium model provides an original and
powerful tool for historical counterfactual analysis not available using standard
dynamic general equilibrium models. The model is used to compare the growth
path followed by the region during the period of interest with a counterfactual
scenariointendedtoevaluatehowtheregionwouldhaveperformedinthecaseofa
contraction of the transfers from the national government to the regional govern-
ment and the families.
viii Preface
The works collected in this book represent a joint effort to take macro CGE
models closer to a realistic description of the response behavior of families and
enterprises to project and policy changes. In real-world situations, market imper-
fections and failures often require the interventions of “visible hands” to reach
feasible and stable equilibria involving nonlinear (shadow) price schemes, where
prices can vary across agents, permitting the efficient management of externalities,
transactioncostsandnon-convextechnologiesorbudgets.Theabilitytomakethese
theoretical challenges tractable is one of the most fascinating items of the future
research agenda of both theoretical and applied general equilibrium analysts.
Thisbookshouldbeusefulasreadingandteachingmaterialingraduatecourses
in economics, especially those focusing on development theory and practice. If
nothing else, it should convince the reader that computable general equilibrium
modelingisadynamicsubject,neednotbeconfinedtospecialists,doesnothaveto
produce black boxes, and can be very helpful in addressing many interesting
questions of political and economic relevance. While theoretical and empirical
controversies on the foundations of general equilibrium are still sharp and partly
unresolved, the essays presented show that designing, estimating, calibrating, and
using CGE models may help economists to raise policy-relevant questions and
shapetheminameaningfulwayandtosuggesteffectiveandimplementablepolicy
solutions.
Verona, Italy Federico Perali
Rome, Italy Pasquale Lucio Scandizzo
Contents
Part I Introduction
General Equilibrium Modelling: The Integration of Policy
and Project Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Federico Perali and Pasquale Lucio Scandizzo
Part II Methodology and Estimation Issues
Demand-Driven Structural Change in Applied General
Equilibrium Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Roberto Roson and Dominique van der Mensbrugghe
Micro-Macro Simulation of Corporate Tax Reforms . . . . . . . . . . . . . . . 53
Antonella Caiumi
Estimating an Energy-Social Accounting Matrix for Italy . . . . . . . . . . . 65
Marco Rao, Umberto Ciorba, Giovanni Trovato, Carmela Notaro
and Cataldo Ferrarese
Analysis of Local Economic Impacts Using a Village Social
Accounting Matrix: The Case of Oaxaca . . . . . . . . . . . . . . . . . . . . . . . . 85
Cataldo Ferrarese and Enrico Mazzoli
Part III Static and Dynamic CGEs and Policy Applications
A CGE Model for Productivity and Investment in Kenya . . . . . . . . . . . 119
Pasquale Lucio Scandizzo, Maria Rita Pierleoni and Daniele Cufari
The Political Economy of the CAP Reform in Italy . . . . . . . . . . . . . . . . 145
Antonella Finizia, Riccardo Magnani and Federico Perali
A CGE Model for Mauritius Ocean Economy . . . . . . . . . . . . . . . . . . . . 173
Pasquale Lucio Scandizzo, Raffaello Cervigni and Cataldo Ferrarese
ix
x Contents
A Micro-Macro Simulation Model Applied to the French Economy:
The Case of a Euro’s Real Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 205
Riccardo Magnani, Luca Piccoli, Martine Carré and Amedeo Spadaro
Green and Blue Dividends and Environmental Tax Reform:
Dynamic CGE Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
Francesca Severini, Rosita Pretaroli and Claudio Socci
A Sub-national CGE Model for the European Mediterranean
Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Francesco Bosello and Gabriele Standardi
A Regional Dynamic General Equilibrium Model with Historical
Calibration: A Counterfactual Exercise . . . . . . . . . . . . . . . . . . . . . . . . . 309
Stefania Lovo, Riccardo Magnani and Federico Perali