Building a computable general equilibrium tax model for Italy

In this paper, we develop a multi-sectoral computable general equilibrium tax model for Italy allowing for a number of fiscal tools. We illustrate the methodology for modelling and accommodating the full range of direct and indirect taxes into the national general equilibrium model. In particular, we build a commodity tax matrix by commodity, source, user and tax type; and a production tax matrix by industry and tax type. We also put a special emphasis on the institutional sector accounts, incorporating a detailed system of equations. Our model provides a powerful tool for acquiring new insights in fiscal policy analysis, through the assessment of tailored tax reforms, which can consist of either changes in tax rates and tax bases for indirect and direct taxes. Finally, to validate the model we perform an equalizing Value-Added-Tax rates reform. We find that a budget-neutral uniform tax rate reform would be GDP and welfare improving. However, results across agents and sectors vary.     

Validation of an R&D-based computable general equilibrium model

A computable general equilibrium (CGE) model is useful for the calculation of macroeconomic effects caused by policy impacts, but it has been considered a sticking point to evaluate how well the CGE model describes the real economy. Among various possible reasons for the difference between the standard CGE model and the real world, this paper focuses on a limited number of primary input factors and a fixed figure for the calibrated coefficient. A CGE model incorporating research and development (R&D) activity is suggested as an alternative to address the problems with the standard CGE model. The proposed model includes the following two setups: (1) a sector's own knowledge is adopted as a production factor, and (2) others' knowledge is regarded as a source of spillover effect to increase the total factor productivity (TFP) coefficient. This R&D-based CGE model is evaluated on whether its correspondence with reality is better than the standard model that omits the two setups. The two models compute baseline scenarios of South Korean economic growth from 1995 to 2010, and these results are compared to actual data. The results show that the R&D-based model fits better than the standard model in cases where the country has high TFP growth.     

Sustainability impacts of car road pricing: A computable general equilibrium analysis for Austria

Nationwide car road pricing schemes are discussed across Europe. We analyse the impacts of such schemes with respect to environmental, economic and social indicators of sustainability, also quantifying the trade-offs among these three dimensions under different charging principles and revenue recycling options. In our analysis we employ a computable general equilibrium (CGE) approach, develop a modelling structure for private transport and provide detailed empirical analysis for the case of Austria. Regarding the social dimension, it has often been argued that poorer households (and commuters) would have to bear a disproportionate share of the road pricing burden. We find the contrary, i.e. a stronger negative policy impact on richer households, and on a small group of intensive car users. The choice of revenue recycling is able to ameliorate the negative social and economic effects of road pricing, without reversing the desired positive environmental effects. For political feasibility, questions of distributional impacts are most urgent and therefore we address them systematically within a quantitative framework.     

Tariff escalation,export shares and economy-wide welfare: A computable general equilibrium approach

The current literature suggests that tariff escalation (TE) lowers the competitiveness of processing sectors. Coffee and cotton are agricultural products that face the problem of TE in developing countries, where we observe low global coffee product export shares but high global cotton textile export shares, posing a question on TE's impact on competitiveness. This paper employs a computable generalised equilibrium (CGE) modelling approach to examine the impact of TE on export shares of processed coffee and cotton textiles. We modify the standard GTAP (global trade analysis project) model to solve for global export shares and simulate the impact of eliminating TE on coffee and cotton to analyse economy-wide trade and welfare implications. Results show that TE has mixed effects on export shares, depending on the initial economic structure. Findings reveal that the elimination of TE on cotton and coffee may generate potential global gains of over US$ 0.7 billion, mainly from the cotton sector. Given the relative size of these sectors in global agriculture, the magnitude of gains is not small. This underlines the need for the policy-makers to examine, address and evaluate the prevalence of TE on a sectoral basis in ongoing WTO negotiations.     

The econometric critique of computable general equilibrium modeling: the role of functional forms

Computable general equilibrium (CGE) models are among the most influential tools in applied economics. However, some serious questions have been raised about the empirical validity of these models. The core of the critique is that the parameter selection criteria are unsound and the use of first-order (CES class) functional forms imposes influential restrictions on the model's structure. A formal summary of the case against standard CGE modeling is presented, as is an alternative econometric-based modeling strategy which answers the critique. We then present a comparative CGE modeling experiment designed to assess the role of function forms. It is found that choice of functional forms affects not only industry-specific results, but aggregate results as well, even for small policy shocks.     

A dynamic general equilibrium model for public R&D investment in Taiwan

In terms of economic development policies, public research and development (R&D) investment may be one of the most critical and useful tools in Taiwan, having frequently played a role in leading related overall investment in Taiwan. Although the impact channels of R&D investment are varied and complex, its benefits in terms of the development of human capital, industrial productivity, and basic research are clear. With the rapid growth of the private sector in the Taiwan economy, it is, however, debatable whether the government should continue to use the public financial budget to invest in R&D. By using a computable general equilibrium (CGE) model to simulate the impact of public R&D investment on the economy in Taiwan, the empirical evidence of the present paper is that public R&D investment gives rise to different short-term and medium-term impacts on real GDP that are mostly felt in the third or fourth years of their implementation among different industries. These impacts then gradually converge back to equilibrium in the long run. Public R&D investment boosts the technology of high-tech industries and increases exports, but it also crowds out the output of primary industries. Although the public R&D investment has a positive effect on the real wage, its effect on inflation should not be overlooked. Because of the pros and cons surrounding the impact of public R&D investment on industries and the economy, the study provided by the present paper can serve as valuable reference not only to decision-makers in government agencies but also to academic researchers.     

The role of miniatures in computable general equilibrium modelling : Experience from ORANI

ORANI is a large general equilibrium model of the Australian economy used by policy analysts and university research workers. This paper describes the role of miniature models in the development and application of ORANI. Miniature versions of ORANI have been useful in (a) explaining results; (b) detecting errors; (c) conducting sensitivity analyses; (d) experimenting with new specifications; and (e) teaching. The present paper concentrates mainly on (a) and (b). A miniature model is developed to explain ORANI results for the effects of increases in protection, reductions in the real costs of labour, increases in oil prices and increases in real aggregate demand.     

Moving beyond the iceberg model: The role of trade relations in endogenizing transportation costs in computable general equilibrium models

Modeling trade and transportation costs is an essential part of multiregional or spatial computable general equilibrium models where interregional trade plays an important rolein shaping economic activity. The majority of such models use the iceberg trade cost approach where part of the produced output (representing the material costs of transportation) is assumed to melt away during transportation. There are a few models which employ a more refined approach with an explicit transportation sector providing transportation services which are then used to ship goods between locations. In this paper we show that this approach, although much more convenient than the iceberg approach, still lacks full usability due to the fact that markets, hence prices are defined at the regional level and as a result, transportation costs can not be endogenous at the trade relation level. Moreover, under regional level market clearing the iceberg and the more detailed approach are equivalent. We propose to refine the definition of market equilibrium and move it to the trade relation level. Using this approach we can gain full advantage of the explicit transport sector in the model with respect to trade cost evolution. We show through simulations that refining the way trade costs are modelled indeed gains new insights, and that moving the market definition to the trade relational level leads to qualitative changes in the effect of labor supply shocks on main model variables. The paper also presents a method to estimate a SAM by reallocating data from standard industries to a transportation sector which is then consistent with the model setup. This SAM can be used to calibrate the refined model with a detailed transportation sector.     

Applying engineering and fleet detail to represent passenger vehicle transport in a computable general equilibrium model

A well-known challenge in computable general equilibrium (CGE) models is to maintain correspondence between the forecasted economic and physical quantities over time. Maintaining such a correspondence is necessary to understand how economic forecasts reflect, and are constrained by, relationships within the underlying physical system. This work develops a method for projecting global demand for passenger vehicle transport, retaining supplemental physical accounting for vehicle stock, fuel use, and greenhouse gas (GHG) emissions. This method is implemented in the MIT Emissions Prediction and Policy Analysis Version 5 (EPPA5) model and includes several advances over previous approaches. First, the relationship between per-capita income and demand for passenger vehicle transport services (in vehicle-miles traveled, or VMT) is based on econometric estimates and modeled using quasi-homothetic preferences. Second, the passenger vehicle transport sector is structured to capture opportunities to reduce fleet-level gasoline use through the application of vehicle efficiency or alternative fuel vehicle technologies, introduction of alternative fuels, or reduction in demand for VMT. Third, alternative fuel vehicles (AFVs) are represented in the EPPA model. Fixed costs as well as learning effects that could influence the rate of AFV introduction are captured explicitly. This model development lays the foundation for assessing policies that differentiate based on vehicle age and efficiency, alter the relative prices of fuels, or focus on promoting specific advanced vehicle or fuel technologies.     

A computable general equilibrium analysis of the welfare effects of trade liberalization under different market structures

Using a static world computable general equilibrium model with 16 sectors and 14 regions, this paper compares welfare effects of trade liberalization of the perfectly competitive model and eight imperfectly competitive models. Our main findings are as follows. First, the size of the welfare impact systematically depends on the type of model. Second, the welfare impact of the perfectly competitive model is not necessarily smaller than those of imperfectly competitive models. Third, the integrated market model tends to have a larger welfare impact than the segmented market model. Fourth, the model with the fixed number of firms tends to have a small welfare impact. Finally, the variety effect tends to have a stronger influence on the welfare effects of liberalization than do scale and markup effects. Differences in the models can be viewed as differences in the economic structures of the regions being analyzed, and therefore the analysis in this paper makes it possible to derive policy implications with regard to the relationship between economic structure and trade liberalization.     

Unawareness and bankruptcy: A general equilibrium model

Summary. We present a consistent pure-exchange general equilibrium model where agents may not be able to foresee all possible future contingencies. In this context, even with nominal assets and complete asset markets, an equilibrium may not exist without appropriate assumptions. Specific examples are provided. An existence result is proved under the main assumption that there are sufficiently many states that all the agents foresee. An intrinsic feature of the model is bankruptcy, which agents may involuntarily experience in the unforeseen states. Received: April 23, 1997; revised version: May 19, 1997     

A Tale of Two Models: Comparing structuralist and neoclassical computable general equilibrium models for South Africa

This paper compares two working models of the South African economy, an orthodox, neoclassical computable general equilibrium model in which savings drive investment, and a more structuralist, eclectic, model for which there is an independent investment function. Both models are calibrated to the same social accounting matrix. Comparative statics of simplified prototype models are presented and identical simulations with the corresponding applied versions are compared. It is seen that the neoclassical model fully supports the principles of the 'Washington Consensus' while the structuralist model requires a far more heterodox set of policies to avoid slow growth or high inflation.     

A bargaining model in general equilibrium

The goal of the paper is to present a simple model of rational endogenous household formation in a general equilibrium framework in which Pareto optimality at the economy level is not necessarily obtained. The simplest example of household formation is the case in which pairs of individuals engage themselves in a bargaining process on the division of some wealth: if an agreement on the distribution is (not) reached, we can say that the household is (not) formed. The vast majority of existing bargaining models predicts agreements on an efficient outcome. A seminal paper by Crawford (Econometrica 50:607–637, 1982) describes a very simple game with incomplete information in which, even with rational agents, disagreement causes welfare losses. We embed that model in a general equilibrium framework and present some results on equilibria both in the bargaining game and the associated exchange economy. Crawford’s results support Schelling’s intuition on the reasons of disagreement: it may arise if players’ commitments are reversible. Crawford shows that high probabilities of reversibility tend to favor the bargaining impasse, in fact with low probability. We prove that even if those probabilities are arbitrarily close to zero, disagreement is an equilibrium outcome, with high probability. That conclusion seems to be an even stronger support to Schelling’s original viewpoint. In the exchange economy model with that noncooperative bargaining game as a first stage, we present significant examples of economies for which equilibria exist. Because of disagreement, Pareto suboptimal exchange economy equilibria exist for all elements in the utility function and endowment spaces and they may coexist with Pareto optimal equilibria even at the same competitive prices.     

A simple dynamic general equilibrium model

We analyse a single sector economy with H > 1 infinitely-lived agents that operate in a continuous-time framework. Utility functions are recursive but not additive. Both efficient and perfect foresight competitive equilibrium allocations are considered. The existence and stability of such allocations are investigated locally, i.e., in a neighbourhood of steady-state allocations. The model is shown to be useful for explaining the distribution of wealth and consumption across agents, and for analysing the way in which wealth redistribution can affect the dynamics of aggregate economic variables.     

Removal of farm subsidies in a regional economy: a computable general equilibrium analysis

There are a number of studies that examine the purchasing power parity (PPP) hypothesis. The empirical findings from the extant literature for the PPP hypothesis are mixed. This article applies univariate and panel Lagrange Multiplier (LM) unit root tests with one and two structural breaks to real exchange rates for 15 Asian countries. The univariate LM unit root tests find evidence of PPP for two-thirds of the sample. The results from the panel LM unit root test support long-run PPP for the Asian countries in the sample. The results from the LM panel unit root tests differ from those of existing panel unit root tests of PPP for Asian countries that have not allowed for the existence of structural breaks.     

A general equilibrium model of statistical discrimination

We study a general equilibrium model with endogenous human capital formation in which ex ante identical groups may be treated asymmetrically in equilibrium. The interaction between an informational externality and general equilibrium effects creates incentives for groups to specialize. Discrimination may arise even if the corresponding model with a single group has a unique equilibrium. The dominant group gains from discrimination, rationalizing why a majority may be reluctant to eliminate discrimination. The model is also consistent with “reverse discrimination” as a remedy against discrimination since it may be necessary to decrease the welfare of the dominant group to achieve parity.     

简化一般均衡模型中一般均衡点的确定

经济学教材在讨论一般均衡的时候,往往以两个人、两种生产要素、两种产品这种最简单的社会作为研究对象,它们通常只阐述了一般均衡的存在,但都没有说明这种最简单的社会一般均衡点的确定即以此作为研究对象。     

Anatomy of a balance-of-payments crisis : Application of a computable general equilibrium model to Turkey, 1978–1980

This paper analyses quantitatively the causes of the foreign exchange crisis in Turkey in the late 1970s through application of a multisector computable general equilibrium (CGE) model. The model incorporates some mechanisms that simulate the actual workings of the foreign exchange market during the turbulent foreign exchange disequilibrium period 1978–1980. It features the simultaneous operation of both quantitative controls and premium rationing schemes. Factors contributing to the foreign exchange crisis are analysed through counterfactual simulations which examine the implications for the Turkish economy of use of a flexible exchange rate, no oil price shock in the 1978–1980 period, and maintaining a constant price-level deflated affective exchange rate. Our results indicate that while exchange rate policy played an important role in bringing about the foreign exchange crisis, the influence of other factors was substancial.     

Analysis of the primary information sectors of Korea and Japan using computable general equilibrium models

Short-run computable general equilibrium models for Korea and Japan in 1980 are used to probe the relative attractiveness of primary information sector (henceforth, PRIS) expansion from both an inter- and intra-country perspective. Five scenarios are modelled: increases in PRIS and ‘other’ exports, domestic demand and PRIS protection, and a shift from export to domestic demand based development. The models do not reflect the ‘real’ behaviour of the two economies but are aimed at assessing the effects of differences in economic structures. The results reinforce and extend those obtained in previous input-output studies. The comparison of sectoral impacts suggests that PRIS expansion is more attractive the ‘rest of economy’ expansion, in both economies. Moreover, a general domestic demand increase produces relatively stronger growth in PRIS than in ‘other’ output. The results also indicate that Korea has a ‘structural advantage’ for PRIS expansion compared to Japan. Lastly, the Japanese economy seems much better suited than the Korean economy for a shift in development strategy.