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slides: Introduction to CGE modelling: Facts and an Instance

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DOI: 10.13140/RG.2.2.11212.44164

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Introduction An Instance CGE Models References

Introduction to CGE modelling

Facts and an Instance Eli Yucheng Quan

School of Economics Fudan University

May 13, 2020

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

CONTENTS

1

Introduction

2

An Instance

3

CGE Models

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

FEATURES

• First CGE Model: A 22-sector model of Norway (Johansen,
• L. (1960). A Multisectoral Study of Economic Growth.)
• Microeconomic principle: derived from sound

microeconomic optimization theory, leading to results with a clear structural or theoretical interpretation (differ from Lieontief IO) .

• General Equilibrium Nature: reflect the physical principle
• f material balance and accouting principle of budgetary

balance (Walrus GE, Multiple-agent approach, differ from efficiency-related literature).

• Detail and Disaggregation: agents and markets are

modeled in an explicit way with as much detail as desired (differ from other structural models).

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

Investment-specific vs Process Innovation in a CGE model of Environmental Policy [2] Claudio Baccianti, Andreas L¨

• schel

Feb, 2015

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

INTRODUCTION

• Motivation: The state of the art of general equilibrium

modelling applied to environmental policy rarely treats product and process innovation separately and product quality is, in the best case, exogenous.

• What they do: Dynamic multi-sector CGE model with

energy, process & product innovation module

• Findings:

Following an energy tax, aggregate innovation declines but whereas process innovation is reduced, product innovation actually rises. Product-related R&D subsidies are less effective than demand pull policies to reduce aggregate energy intensity.

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

MODULES AND ASSUMPTIONS IN CGE MODEL: BASIC

SETTINGS

• Agents:
• Households and final demand
• Producers
• Government & trade
• Modules: added out of need for analysis
• Hicks neutral technological change (process innovation)
• Investment-specific technological change (product

innovation)

• Energy

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

PROCESS & PRODUCT INNOVATION

Consumption goods producers: monopolistic firm

• Step 1 of maximization problem

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

PROCESS & PRODUCT INNOVATION

Capital goods producers: monopolistic firm

• Step 1 of maximization problem
• Step 2 of maximization problem: select quality of K and

price

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

PROCESS & PRODUCT INNOVATION

• Energy sector: perfectly competitive
• Maximization problem
• Quan, 2020

Introduction to CGE modelling

Introduction An Instance CGE Models References

CONSISTENT DATASET

• Basic data: from SAM for the EU27
• R&D expenditures by sector: from OECD ANBERD

database for year 2008

• Splitting the R&D statistics into values relative to product

and process innovation: rely on the results of the Community Information Survey

• Integrate R&D expenditure data into the SAM: Knowledge

capital generates in each year a flow of compensation for R&D services that needs to be computed; debits the R&D investment value to the intermediate consumption columns

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

MODEL CALIBRATION

• Data for the base year are used as reference for setting

benchmark values of all share parameters in production functions and final demand.

• Refer to previous studies (Otto et al. 2008[5] and Baccianti

2013) for calibrating the elasticities of substitution of production and utility functions.

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

SOME RESULTS: ENERGY TAX

• Simulate the impact of a 25% proportional tax on the

energy price.

EI: energy intensity; ED: energy demand; C: aggregate consumption; Q: quality stock of capital goods AGR: Agriculture; EIM: Energy-intensive Manufacturing; NEIM: Low Energy Intensity Manufacturing; TrTr: Transport and Trade; SERV: Services; CAP: Capitcal Good Manufacturing Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

SOME RESULTS: FOUR SCENARIOS

• Four scenarios: 15% product R&D subsidy, 15% process

R&D subsidy, 25% energy tax, 20% investment subsidy

Figure: Ratio of product R&D to process R&D in capital good sector

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

FURTHER DISCUSSION

• Human capital is neglected, which may release the

negative impact of the energy tax.

• Knowledge spillovers are neglected.
• Directed technical change.

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

STEPS IN APPLIED CGE MODELLING

1

Specify dimensions of the model and choose key causal relations.

2

Choose functional forms.

3

Construct consistent data set.

4

Calibration and econometric estimation. The model should be able to replicate real case scenarios.

5

Counter-factual experiments, scenario and impact analysis.

6

Regular updating.

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

FORMS OF PRODUCTION FUNCTION

Table: Regional Studies and Production Functions

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

FORMS OF PRODUCTION FUNCTION

Figure: Porduction structure of climate-embedded GEMPACK

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

ADVANTAGES IN POLICY ANALYSIS

A widely applicable methodology in policy analysis.

• Policy Relevance: explicitly link values of policy

instruments to economic outcomes of interest to policymakers.

• Transparency: The links between policy instruments and

economic outcomes are traceable and easy to explain.

• Timeliness: based on recent, relevant data, since it is to be

used on ongoing policy debates.

• Estimation and Validation: can be validated for the

domain of application of the model.

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

REFERENCES I

• Literature review of existing CGE models[4]
• The prevalent CGE textbook [3]
• The handbook contains more instances [1]

[1] Introduction to the series. In Peter B. Dixon and Dale W. Jorgenson, editors, Handbook of Computable General Equilibrium Modeling SET, Vols. 1A and 1B, volume 1 of Handbook of Computable General Equilibrium Modeling, page ii. Elsevier, 2013. [2] Claudio Baccianti and Andreas L¨

• schel.

Investment-specific vs process innovation in a cge model of environmental policy. Technical report, WWWforEurope Working Paper, 2015.

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

REFERENCES II

[3] Mary E. Burfisher. Introduction to Computable General Equilibrium Models. Cambridge University Press, 2 edition, 2017. [4] Ant´

• nio Gomes de Menezes, M´

ario Fortuna, Francisco Silva, and Jos´ e Cabral Vieira. Computable general equilibrium models: A literature review. 2006. [5] Vincent M. Otto, Andreas L¨

• schel, and John Reilly.

Directed technical change and differentiation of climate

• policy. Energy Economics, 30(6):2855 – 2878, 2008.

Technological Change and the Environment.

Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References

THE END

Quan, 2020 Introduction to CGE modelling

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