Estimation of Armington elasticities in a CGE economy-energy-environment model for Europe

The main goal of the article is to estimate Armington elasticities of the energy and energy-intensive sectors of the GEM-E3 computable general equilibrium model. The model follows the standard two-stage budget optimisation of the consumer by first optimising between domestically produced and imported goods and, then, by country of origin. A panel data econometric framework is used here with dynamic adjustment to capture both the long and short term elasticities for the studied six aggregated sectors in Europe. The estimated long-term elasticities are in line with the literature, but higher than those used in the GEM-E3 model. The results suggest that consumer choice appears to be more price sensitive between the domestic and the composite imported goods, and amongst the importers, than already assumed in the model.     

Adjustment costs and threshold effects in factor demand relationships

It has been recently argued that producers may not respond to every input price change in the way that a linear factor demand model would predict. This lumpy response is due to adjustment costs that are inherent in the act of adjusting the mix of inputs applied in the underlying production technologies. This study aims to provide a solid conceptual framework for these nonlinearities in factor demand relationships. Industry-specific implications of convex and non-convex adjustment costs for the linearity of the factor demand relationships as well as price and substitution elasticities are explored. A two-regime threshold system of factor demand equations is estimated for several manufacturing industries in the United States. Empirical results suggest significant threshold effects in the factor demand relationships in most nondurable goods sectors. The size and the nature of thresholds depend upon industry characteristics, including input composition and (non)convexity of underlying adjustment costs. Complete matrices of price and substitution elasticities for each industry are derived using estimates of threshold factor demand systems. Discussion of two contrasting cases in greater detail sheds light on how the effect of price shocks on factor demand relationships varies across industries with different adjustment cost structures.     

Are Armington elasticities different across countries and sectors? A European study

CGE models are widely used for policy evaluation and impact analysis especially with respect to trade reforms, tax reforms, energy sector reform and development policy analysis. However, the results of such models are often argued to be sensitive to the choice of exogenous parameters such as trade elasticities. Several authors show that the choice of the so-called Armington elasticities in the demand function has a strong influence on the simulation results. Most existing estimates of Armington elasticities are only for the US. The few studies for other countries find substantially differing results. Nevertheless, many CGE modelers simply adopt the elasticities from other studies disregarding specific country and model characteristics. This paper aims at providing estimated elasticities based on recent data for a larger group of European countries. Using cointegration and panel fixed effects analyses we estimate the first order condition resulting from cost minimization or utility maximization subject to the CES utility or cost function in imports and domestic goods. The results show a rather large variation across sectors and countries and the magnitude is only partly comparable to the US elasticities. Moreover, in a small CGE application we are able to show that changing the elasticity set has a quantitative and even qualitative impact on CGE model results, which confirms the concern that one might end up with biased results due to a misspecification of the elasticities.     

Factor Substitutability in Australian Manufacturing with Emphasis on Energy Inputs*

In this paper a model of the production structure in the aggregate Australian manufacturing sector is estimated, emphasizing the use this sector makes of energy inputs. A translog cost function is estimated with time-series data for four inputs, capital services, labour services, energy and materials and likewise an energy submodel is estimated for solid fuels, oil, electricity and gas. The substitutabilily and the complementarity relationships between the various factor inputs and between the various fuels are examined: an interesting finding is that capital and energy are substitutes and labour and energy are complements. Factor price elasticities are calculated and turn out to be quite significant. The study concludes that rising energy prices will induce significant shifts in both the mix of fuel inputs and the level of aggregate energy utilization.     

Oil shocks and the dynamics of substitution adjustments of industrial fuels in the US

This paper investigates substitution among such alternate fuels as coal, natural gas, and electricity during the actual oil price increases of 1970s. These substitution adjustments are assumed to be dynamic and modelled by a partial adjustment structure. This dynamic structure is incorporated into a translog cost technology. Short- and long-run price elasticities are estimated by identifying inter- and intra-industry variations. The models are estimated with a sample of 88 pooled observations, including distillate and residual oils purchased by eleven 2-digit manufacturing groups (1974-81). Models are estimates are strictly negative. These own price elasticities range from (long-to short-run) –2.93 to –2.55 for distillate oil, –0.698 to – 1.53 for residual oil, –0.533 to 0.011 for coal, –0.235 to –0.213 for natural gas, to –0.888 to –0.845 for electricity. Estimastes of both short-run and long-run cross-price elasticities suggest that coal and electric energy are the prominent substitutes for fuel oils. While the relationship between the latter and natural gas remains largely complementary.     

The effect of communication and energy services reform on manufacturing firms’ innovation

Upstream services liberalization improves the efficiency and cost of communication and energy services, reducing the marginal costs of downstream manufacturing firms through input-output linkages. This study explores one possible mechanism behind this finding: innovation. I investigate the effects of communication and energy services reform in India in the mid-1990s on downstream manufacturing firms’ decisions to invest in R&D. The empirical analysis uses manufacturing-firm level data and regulation indicators in the communications and energy service sectors. The liberalization of services in India had a positive effect on manufacturing-firm innovation. These results are concentrated on firms in the middle of the initial productivity distribution. The main channel is the elimination of entry barriers into the communication sector.     

The nexus between sectoral FDI and institutional quality: empirical evidence from Pakistan

This study investigates short- and long-run bidirectional causality between institutional quality and sectoral-level FDI in Pakistan by using the ARDL technique. The results confirm that long-run bidirectional causality exists between institutional quality and aggregate FDI. The in-depth sectoral-level FDI analysis substantiates the presence of long-run bidirectional causality between institutional quality and FDI in services and manufacturing sectors, while no long-run causality is observed between institutional quality and FDI inflows in primary sector. Furthermore, the results in the study reveal short-run bidirectional causality only between institutional quality and manufacturing FDI and report insignificant short-run causal link between institutional quality and FDI in primary and services sectors. The overall findings of the study suggest that in the long-run institutional quality attract FDI and FDI inflows, particularly to manufacturing and services sectors, significantly enhance the quality of institutions in Pakistan.     

Does services liberalization affect manufacturing firms’ export performance? Evidence from India

This paper investigates the relationship between the reform of energy, telecommunications and transport services in India in the mid-1990s and manufacturing firms’ export performance. The empirical analysis relies on exogenous indicators of regulation of Indian services sectors and detailed firm-level data from India in the 1994–2004 period. I find that the reform of upstream services sector has increased the probability of exporting and export sales shares of firms producing in downstream manufacturing industries. The results suggest that the effect of services liberalization on manufacturing firms’ export performance is stronger for initially more productive firms. These empirical findings are robust to alternative econometric specifications that control for other reforms, industry, firm characteristics and that deal with potential reverse causality concerns.     

Incentives for investment in energy efficiency: an econometric evaluation and policy implications

Technical studies suggest that there exist many opportunities to improve energy efficiency, and that a substantial proportion is profitable by current business standards. This study deals with the question why so many of these profitable opportunities are not used. Reasons for not implementing profitable opportunities are idetified, and their effect is estimated on the basis ofa survey among Dutch firms, designed specifically for this study. The reasons that prevail indicate what policy measures may accompany energy taxes in the pursuit of energy efficiency improvement. In addition, energy efficiency elasticities are estimated, as well as the factors that determine the elasticities. These too indicate opportunities for government policy, if it wants to improve the effectiveness of energy taxes.     

Estimating Sectoral Disinflation Cost in India: Some Structural VAR Evidence

This paper attempts a sectoral estimation of sacrifice ratios for India. Two Structural VAR models are estimated using quarterly data for the period 1997–98 Q1 to 2016–17 Q1. The empirical findings suggest that the real cost of disinflation policy is not negligible in India. The estimate of sacrifice ratios in terms of real GDP range from 0.16 to 0.17 depending upon the model employed. The calculation of sectoral sacrifice ratios show that all the three sectors are affected negatively and the largest impact is found in the manufacturing sector followed by the other two sectors, i.e., agriculture sector and service sector. The sacrifice ratio in the manufacturing sector is found to be 1.10 and 0.72 indicating huge negative impact of tight monetary policy. Similarly, for the agriculture sector the sacrifice ratios are 0.40 and the service sector shows sacrifice ratios of 0.36 and 0.37 respectively for different models. Further, from 10-year rolling estimation, we find that sacrifice ratios are time varying. The sacrifice ratio is declining in the last few quarters at the aggregate and sectoral levels indicating that disinflation could be less costly in recent times. However, the high disinflation cost experienced prior to the year 2015 can’t be neglected. So, it is important to take caution while interpreting the results of disinflation cost in India.

     

Interfuel and interfactor substitution in Ontario manufacturing, 1962-82

The extent of substitutability between energy and the other factors (i.e. labour and capital) is an extremely important question and quite central to energy policy, planning and analysis. This paper addresses this question for the Ontario manufacturing sector. The theoretical model utilized in this analysis is the two–stage translog production frontier. The model was estimated for seven manufacturing sectors using four disaggregated energy inputs and labour and capital. The model was estimated by the FIML technique for the period 1962–82.     

Energy Consumption for Space Heating: A Discrete–Continuous Approach

Energy demand for space heating is estimated using a discrete–continuous choice model which focuses on the relationship between the choice of heating equipment and energy consumption. The model is estimated on Norwegian micro data, and the two stages of the model are estimated simultaneously. The capital cost and the operating cost of the heating systems are both found to have a significant impact on the choice of heating system. Furthermore, the results show that household characteristics are important variables in residential energy models. Energy price elasticities and income elasticities are also estimated.     

Consumer behaviour in India: An application of the Rotterdam demand system

The purpose of this paper is to analyse the extent to which the observed data support the postulates of neoclassical theory of consumer behaviour. The absolute price version of the Rotterdam model has been estimated for rural and urban areas of India separately. The results indicate a trade off between theoretical consistency and goodness of fit. The symmetry, but not homogeneity, conditions are found to be empirically valid in rural India. All the other hypotheses are rejected both in rural and urban areas of India. Frequent violation of convexity conditions is also observed. The estimated marginal budget shares, income and price elasticities show marked differences in consumption patterns of rural and urban consumers in India. The effect of foodgrains price rise on the demand for various items is also analysed.     

The Multi-Sectoral Thirlwall’s Law: evidence from 14 developed European countries using product-level data

The paper reports estimates of import and export functions for five technological sectors in 14 developed European countries. These functions have never before been estimated for developed countries adopting a technological classification of sectors. The paper compares estimates of income elasticities found using vector error-correction models employing aggregate deflators, with estimates found using cross-product panels employing product-specific quality-adjusted price indexes recently calculated by Feenstra and Romalis. The results indicate that the income elasticities of imports and exports are higher for medium- and high-tech manufactures, which suggests the importance of moving from the production of simple goods to the production of goods with high technological content. The estimates also suggest that the Multi-Sectoral Thirlwall’s Law holds for the countries analysed, while comparing the estimates revealed that cross-product panels with quality-adjusted prices generate considerably more robust results. The investigation reveals that using a more recent time period generates estimates of income elasticities of demand for primary products and resource-based manufactures that tend to be higher than the estimates found by studies that have used longer time periods, while the opposite holds for low-, medium-, and high-tech manufactures.     

Margins,Concentration and Oligopolistic Interdependence*

In this paper we examine the relationship between margins, elasticities of demand and the Hirschman-Herfindahl index of concentration for Australian manufacturing. Our main aim is to estimate the degree of collusion in various manufacturing sectors in the years 1968-69, 1972-73 and 1977-78. There appear to be marked differences in the apparent degree of collusion between industries. It is argued that once sub-optimization is allowed the Cowling-Waterson model will yield biased estimates of the degree of collusion.     

Trade Liberalization and the Efficiency of Firms in Indian Manufacturing

Has the efficiency of firms in India improved since its liberalization in 1991? The authors attempt to answer this question by analyzing the determinants of firm‐level efficiency in six manufacturing sectors in India while focusing on the effects of liberalization and domestic competition. They find that there was an increase in overall efficiency in the post‐reform period in India in five out of the six sectors. While imports do not seem to improve efficiency, liberalization did increase efficiency in four of the sectors.     

A new approach to determining sectoral priorities in an economy: input–Output elasticities

This paper uses input–Output elasticities to identify important economic sectors. Elasticities of output employment and income are used to identify key sectors of the Greek economy. A comparison of the rankings of economic sectors based on input–output elasticities with those based on net backward linkages indicates significant divergence in sectoral rankings obtained from the two approaches. The elasticity approach yields more consistent estimates of sectoral output employment and income potentials than the net backward linkage approach. Measured in terms of the potential to generate output employment and income agriculture services and textiles are found to be the key sectors for the Greek economy.     

External income shocks and Turkish exports: A sectoral analysis

This study assesses how the growth rates of Turkish trading partners affected Turkish exports in various sectors for the period 1996:01 to 2009:12. To determine this, we modeled the destination countries and the export demand for each sector separately. Each model is estimated as a system of equations, where each equation represents a country using a seemingly unrelated regression method. The empirical evidence suggests that Motor Vehicles, Basic Metals, and Radio–Television are the sectors with the highest income elasticities for most of the analyzed countries, whereas the Food Products and Beverages sector has the lowest income elasticity. We also performed simulations for the effect of a 1% increase in the growth rate of each country on Turkish exports.     

Substitution of labour,capital and energy in the manufacturing sector of Pakistan

Share equations of labour, capital, energy and fuel types, derived from translog cost functions, are estimated by Zellner iterative method to obtain elasticities of labour, capital, energy and fuel types and elasticities of substitution between them. Labour, capital and energy appear as substitutes, natural gas and electricity as complements, and other fuels as substitutes.     

Intertemporal substitution in import demand and the role of habit formation: an application of Euler equation approach for Pakistan

Introduction

The study examines the importance of intertemporal substitution in import demand considering the role of habit formation. A two-goods version of the permanent income model is used in which time-non-separability in consumers’s preferences is assumed. The model is estimated using annual data for Pakistan at disaggregated level covering the period from 1977 to 2017.

Objectives

The objective of the study is to estimate elasticities of substitution along with parameters of habit formation for consumption goods at a disaggregated level.

Method

The study employs co-integration for the estimation of parameters of elasticities of substitution and generalized method of moments (GMM) for the estimation of the parameters of habit formation from Euler equations.

Findings

The estimates of intertempral elasticity of substitution suggest that the nature of commodity group (necessity/luxury) plays an important role when consumers are making intertemporal choices. Moreover, the study finds that intratemporal elasticity of substitution is larger than intertempral elasticity of substitution in almost all cases in Pakistan, suggesting that imported and domestic goods are best described as substitutes in Edgeworth-Pareto sense. In addition, the inclusion of habit formation delivers results with plausible signs and the habit formation process seems significant for certain commodity groups including tea, beverages, tobacco products and drugs.

Conclusion

The study concludes that there is a possibility of crowding out effect on domestic consumption and the depreciation of local currency may improve Pakistan’s balance of trade.