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8 Applied GE modeling of economy & environment. Rationales Basics of applied GE models Incorporating environmental issues An application Main source: OEE Ch. 5.

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8 Applied GE modeling of economy & environment

  • Rationales

  • Basics of applied GE models

  • Incorporating environmental issues

  • An application

    Main source: OEE Ch. 5.

    Additional: Shoven & Whalley, JEL 1984; Ginsburgh & Keyzer, Structure of applied general eq. models (MIT Press, 1997); Coxhead, World Development 28(1),2000.

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Pros and cons of AGE modeling

  • Importance of economy-wide mechanisms and implications

  • Intractability of higher-dimension analytical models

  • Opportunities for ‘structural sensitivity analysis’

    X Limitations

    • Time is usually not explicitly taken into account

    • Micro details such as risk/uncertainty or credit market imperfections usually ignored

    • aggregations can mask important differences (e.g. intra-industry variations)

    • AGE approach is highly time and energy-intensive: benefits over PE approach obtained at high cost.

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Overview of AGE models

  • Describe Walrasian equilibria in fairly detailed manner--sufficient to support policy claims

    • Too large to be solved analytically; must use numerical solutions instead

    • But structure and results depend on same theoretical foundations

  • Advantages and disadvantages of size.

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An N-good, F-factor economy

  • General structure

  • Equilibrium conditions

  • Closure rules and decisions

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Variables in the basic model

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  • No. of equations must match endog. vars.

    • In (5.1)-(5.8): 4N + F + FN + M + 1 eqns.

    • But we have 5N + 2F + FN + 2 variables.

    • Must choose N - M + F + 1 exog. vars

      • Declare V exog; (N - M) elements of P, and .

  • Now (5.1)-(5.8) solves for Y, W, R, X, D, S and U as endogenous variables.

    • Endogenous: income, factor prices, quantities produced and demanded, trade, and utility.

    • Exogenous: factor endowments, traded goods’ prices and a numeraire price.

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Closure rules and decisions

  • Other closures are possible

    • ‘Neoclassical’ closure has all domestic prices flexible

    • Alternatives: e.g. fix wages, allow unemployment in labor market.

  • These choices reflect our beliefs or observations about the real world.

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Other features

  • Can add in:

    • Intermediate inputs

    • Products distinguished by source (domestic, imported)

    • Different kinds of labor

    • Many sources of final demand

    • Trade and transport ‘margins’

    • Tariffs, taxes, and other policies … etc.

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Solving the model: the ‘Johansen’ AGE structure

  • First-order approximations to changes in variable values

  • Models solved in proportional (percentage) changes of variables, or ‘hat calculus’.

  • Advantages:

    • Models are linear in variables

    • Parameter values are intuitive and accessible (shares from SAM, elasticities from other sources)

    • Simulation results are additive in separate shocks

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Features of Johansen models

  • Parameter values are shares and elasticities

  • Quick checks:

    • Homogeneity & ‘balance’ of underlying data base.

  • Solution is by matrix inversion

    • Entire model is a system of linear equations

  • Examples of Johansen-style models:

    • ORANI (Australian economy)

    • GTAP (international agricultural trade)

    • Models in OEE, Ch.6–8

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  • Social accounting matrix: base year data

    • Input-output accounts of industries

    • Factor markets, household incomes & expenditures

    • Trade and final demand

    • Taxes and G. expenditures

    • Micro and macro balance

  • Elasticities

    • Estimated (see www.aae.wisc.edu/coxhead/apex ), or more commonly ‘guesstimated’.

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    Schematic social accounts



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    Social accounting matrix

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    ‘Standard’ national accounts ignore environment

    • Assumptions:

      • Property rights on resources

      • No externalities

      • No non-marketed amenity values

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    Open access to natural capital

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    Addressing env. damages and natural resource depletion

    • Pigovian taxes (Bovenberg & Goulder, AER 1996)

    • Private purchase of abatement services

    • Public provision of abatement or clean-up services

    • Quotas or limits on resource use or emissions (command & control)

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    Environmental analysis in GE

    • Most AGE models constructed for more general analytical purposes: environmental structure is added later

      • Given uncertainty about env. variables and valuations this may be appropriate!

  • Industrial emissions: ‘side calculations’

  • Natural resource degradation

  • Questions about institutions.

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    Deforestation & land degradation

    • Commercial and non-comm’l deforestation: does timber have market value?

      • Non-comm’l deforestation is driven by search for land, and responds to changes in the marginal valuation of land in agricultural production...

      • … although institutional setting also matters

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    Land degradation

    • Hard to measure, and problems of aggregation.

    • Can use information on erosion rates by crop, together with land use data, to build ‘baseline’ data set.

      • Then erosion changes can be inferred from changes in land use

    • Production externalities: technical ‘regress’.

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    Institutional issues

    • Trees may be cut (or planted) to establish property rights over land.

    • In open access forests (non-commercial), opportunity cost of forest is set by ag. land values and clearing costs.

    • In commercial forestry, timber harvesting/replanting also depends on property rights.

      • Will an increase in timber prices promote or retard tree-felling in aggregate? Depends on property rights.

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    ‘Structural sensitivity analysis’

    • Alter assumptions about market clearing

    • Alter assumptions about property rights

    • Alter assumptions about macroeconomic closure

      • e.g. Adjustment to equilibrium through domestic tax system vs. adjustments through accommodating international capital flows.