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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
875-8.ppt8 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.

pros and cons of age modeling
875-8.pptPros 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.
overview of age models
875-8.pptOverview 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.
an n good f factor economy
875-8.pptAn N-good, F-factor economy
  • General structure
  • Equilibrium conditions
  • Closure rules and decisions

Variables in the basic model

  • 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.
closure rules and decisions
875-8.pptClosure 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.
other features
875-8.pptOther 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.
solving the model the johansen age structure
875-8.pptSolving 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
features of johansen models
875-8.pptFeatures 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
  • 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’.
standard national accounts ignore environment
875-8.ppt‘Standard’ national accounts ignore environment
  • Assumptions:
    • Property rights on resources
    • No externalities
    • No non-marketed amenity values
addressing env damages and natural resource depletion
875-8.pptAddressing 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)
environmental analysis in ge
875-8.pptEnvironmental 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.
deforestation land degradation
875-8.pptDeforestation & 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
land degradation
875-8.pptLand 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’.
institutional issues
875-8.pptInstitutional 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.
structural sensitivity analysis
875-8.ppt‘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.