Federico Perali  Pasquale Lucio Scandizzo Editors The New Generation of Computable General Equilibrium Models Modeling the Economy The New Generation of Computable General Equilibrium Models Federico Perali Pasquale Lucio Scandizzo • Editors The New Generation of Computable General Equilibrium Models Modeling the Economy 123 Editors Federico Perali Department of Economics University of Verona Verona Italy Pasquale Lucio Scandizzo Economics Foundation—CEIS University of Rome Tor Vergata Rome Italy ISBN 978-3-319-58532-1 ISBN 978-3-319-58533-8 https://doi.org/10.1007/978-3-319-58533-8 (eBook) Library of Congress Control Number: 2018934402 © Springer International Publishing AG, part of Springer Nature 2018 This work is subject to copyright All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations Printed on acid-free paper This Springer imprint is published by the registered company Springer International Publishing AG part of Springer Nature The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland 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 working group and then a workshop within the Association of Italian Development 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 continued to collaborate and correspond after the workshop Some members of the 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 of further 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, but also reaching back to basic assumptions and theoretical tenets for a 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 echoes the fact that the practical reasons of model successes reside in their capacity 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 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 have been evolving for the past 20 years The chapter discusses the basic theoretical models that lay behind the CGEs and their SAM cores, with special emphasis on the fundamental differences that emerge on their interpretation under alternative economic theories, and assumptions on the cause–effect relations hypothesized 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, concerning both special problems of dynamic representation of the economic system (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” –“Analysis of Local Economic Impacts Using a Village Social Accounting Matrix: The Case of Oaxaca”) This part focuses on solutions to incorporate special structural 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 demanddriven structural changes, embedded in the model as an effect of changing tastes over time Chapter “Micro-Macro Simulation of Corporate Tax Reforms” discusses the potentialities of integrating microsimulation models and CGE-SAMs and presents a microsimulation analysis of a recent corporate tax reform in Italy The micro model 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 Accounting Matrix for Italy” describes the estimate of an energy model for Italy that integrates some of the information of a comprehensive technology optimization model for energy (TIMES (The “TIMES”, Integrated MARKAL-EFOM System) with a detailed SAM Chapter “Analysis of Local Economic Impacts Using a Village 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 ordered set of national, regional, and local accounts The application described uses national and regional statistics as well as survey methods of estimation 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 economies of the disparate economic realities of other continents and, thanks to its ease of operation and interpretation, can be used both as an impact evaluation tool for large projects and as a policy evaluation platform for local and national politicians 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 problems 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 “A Micro-Macro Simulation Model Applied to the French Economy: 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, they have in common a focus on specific policy questions, rather than an attempt to build a model with special structural or time-varying characteristics Thus, while the 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 and can be interpreted in a broader framework This is the case, for example, of the 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 describing the allocation of land use, crop growth, and flood risk at the local level Such an integrated approach coupled with an appropriate treatment of spatial heterogeneity produces information that is highly relevant to both planners and the business community The proper treatment of heterogeneity is fundamental not only 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 devoted to the ex ante socio-economic evaluation of the impact of the CAP reform on Italian agriculture and the whole economy using a micro-funded general equilibrium model that differentiates the impact at the household level and for each interest group involved in the policy process The political economy analysis of the 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 of the possible social conflicts arising from the implementation of the reform and a 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 distributional 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 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 equilibrium model introduces a novel historical calibration technique based on two 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 scenario intended to evaluate how the region would have performed in the case of a contraction of the transfers from the national government to the regional government 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 imperfections 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, transaction costs and non-convex technologies or budgets The ability to make these theoretical challenges tractable is one of the most fascinating items of the future research agenda of both theoretical and applied general equilibrium analysts This book should be useful as reading and teaching material in graduate courses in economics, especially those focusing on development theory and practice If nothing else, it should convince the reader that computable general equilibrium modeling is a dynamic subject, need not be confined to specialists, does not have to 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 shape them in a meaningful way and to suggest effective and implementable policy solutions Verona, Italy Rome, Italy Federico Perali Pasquale Lucio Scandizzo Contents Part I Introduction General Equilibrium Modelling: The Integration of Policy and Project Analysis Federico Perali and Pasquale Lucio Scandizzo Part II Methodology and Estimation Issues Demand-Driven Structural Change in Applied General Equilibrium Models Roberto Roson and Dominique van der Mensbrugghe 39 Micro-Macro Simulation of Corporate Tax Reforms Antonella Caiumi 53 Estimating an Energy-Social Accounting Matrix for Italy Marco Rao, Umberto Ciorba, Giovanni Trovato, Carmela Notaro and Cataldo Ferrarese 65 Analysis of Local Economic Impacts Using a Village Social Accounting Matrix: The Case of Oaxaca Cataldo Ferrarese and Enrico Mazzoli Part III 85 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 .. .The New Generation of Computable General Equilibrium Models Federico Perali Pasquale Lucio Scandizzo • Editors The New Generation of Computable General Equilibrium Models Modeling the Economy. .. F1−1 if the number of factors is the same as the number of IT goods, a generalized inverse of F1 if the number of factors is less than the number of IT goods, and the inverse of a submatrix of F1... function of: (a) the preferences of the families (summarized in the product demand and the supply of factors), (b) technology (synthesized in the functions of supply of products and demand of the