Handbook of COMPUTABLE GENERAL EQUILIBRIUM MODELING VOLUME Edited by Peter B. Dixon Centre of Policy Studies, Monash University Dale W. Jorgenson Harvard University Amsterdam Boston Heidelberg London New York Oxford Paris San Diego San Francisco Singapore Sydney Tokyo North-Holland is an imprint of Elsevier
Contributors Preface xv xix 12. Global Applied General Equilibrium Analysis Using the Global Trade Analysis Project Framework 815 Thomas Hertel, 12.1. Introduction: What Is GTAP and Why Has it succeeded? 815 12.2. Design of the Standard GTAP Modeling Framework 825 12.3. Model Validation and Systematic Sensitivity Analysis 837 12.4. Software ah,d Implementation Issues 841 12.5. GTAP-based Analysis of Global Economic Integration 844 12.6. CGE Modeling of Global Environmental Issues 857 12.7. Future Directions for GTAP 864 References 867 13. Estimating Effects of Price-Distorting Policies Using Alternative Distortions Databases 877 Kym Anderson, Will Martin, Dominique van der Mensbrugghe 13.1. Introduction 878 13.2. Concern with Missing Price-Distorting Measures 880 13.3. Concern with the Counterfactual z. 9 0 2 13.4. Concern with Tariff Aggregation ' 919 13.5. Conclusions 927 References 928 14. Modeling the Global Economy Forward-Looking Scenarios for Agriculture 933 Dominique van der Mensbrugghe 14.1. Introduction _ 933 14.2. Global Modeling at the World Bank 935 14.3. Model Specification ' 940 14.4. Macroeconomics of the Baseline Scenario 954 14.5. Agriculture Towards 2050. 960 14.6. Climate Change and Its Impacts 978 14.7. Concluding Thoughts 986 Appendix 988 References 991
Contents 15. A Global Approach to Energy and the Environment: The G-Cubed Model 995 Warwick J. McKibbin, Peter J. Wilcoxen 15.1. Introduction 995 15.2. Structure of the Model 997 15.3. Summary of Key Applications and Insights 1012 15.4. Sample Applications 1026 15.5. Conclusion 1062 References 1063 16. Integrated Economic and Climate Modeling 1069 William Nordhaus 16.1. Introduction ( 1069 16.2. Dice and Rice Models as Examples of lams 1079 16.3. Illustrative Model Results: The Copenhagen Accord 1095 16.4. Some Major Issues for Research in IAM 1106 16.5. Final Thought*. 1126 References 1127 17. An Econometric Approach to General Equilibrium Modeling 1133 Dale W. Jorgenson, Hui Jin, Daniel T. Slesnick, Peter J. Wilcoxen 17.1. Introduction 1134 17.2. Econometric Modeling of Producer Behavior 1138 17.3. Application of the Kalman Filter 1143 17.4. Instrumental Variables and Specification Tests 1146 17.5. Empirical Results on Producer Behavior 1151 17.6. Econometric Modeling of Consumer Behavior 1164 17.7. Data Issues in Modeling Consumer Behavior, 1175 17.8. Aggregate Demands for Goods and Leisure 1180 17.9. Intertemporal Allocation of Full Consumption 1186 17.10. Computing Confidence Intervals 1189 17.11. Conclusions 1201 Appendix 1203 References 1210 18. Trade Elasticity Parameters for a Computable General Equilibrium Model 1213 Russell Hillberry, David Hummels 18.1. Introduction 1213 18.2. Why do Trade Elasticities Matter? 1216 18.3. Import Demand Elasticities 1220 18.4. Export Supply 1246 18.5. Gravity, Trade Costs and Structural Estimation 1257 References 1267
Contents vii 19. Validation in Computable General Equilibrium Modeling 1271 Peter B. Dixon, Maureen T. Rimmer 19.1. Introduction 1271 19.2. Checking the Code: Homogeneity Tests and Other Checking Simulations 1274 19.3. Validation Through the GDP Identity 1281 19.4. Validation Through Back-of-the-Envelope (BOTE) Analysis and Other Plausibility Checks. 1297 19.5. Consistency with History 1311 19.6. Forecasting Performance 1314 19.7. Conclusion... 1324 Appendix: Relationship Between the Percentage Changes in Output, Inputs and Technology Variables: Derivation of (19.12) and (19.15) 1327 References 1328 20. Solution Software for Computable General Equilibrium Modeling 1331 Mark Horridge, Alex Meeraus, Ken Pearson, Thomas F. Rutherford 20.1. Introduction ' 1331 20.2. Early Days 1333 20.3. General-Purpose Software 1335 20.4. Levels and Change Solution Methods 1339 20.5. General Features of CGE Models \ 1343 20.6. Three Representations of a Simple Model 1348 20.7. Curse of Dimensionality ^ 1372 20.8. Checking and Debugging Models 1374 20.9. Comparing Features of GAMS and GEMPACK ~ 1375 20.10. Concluding Remarks 1377 References - : 1379 21. Income Distribution in Computable General Equilibrium Modeling 1383 Francois Bourguignon, Maurizio Bussolo 21.1. Introduction 1384 21.2. Static Distribution Oriented Macro Micro Models Based on Walrasian CGE 1387 21.3. Static Macro Micro Distributional Models with Real or Apparent Labor Market Imperfections 1394 21.4. Dynamic Macro Micro Modeling ' 1404 21.5. GIDD Model as an Example of a Global Dynamic Macro-Micro Model ' 1414 21.6. Concluding Remarks 1431 References 1433
viii Contents 22. The New Keynesian Approach to Dynamic General Equilibrium Modeling: Models, Methods and Macroeconomic Policy Evaluation 1439 Sebastian Schmidt, Volker Wieland 22.1. Introduction 1439 22.2. The New Keynesian Approach to Monetary Economics: A Brief History of Thought 1441 22.3. Building New Keynesian Models 1443 22.4. Methods for Model Solution and Estimation 1465 22.5. A New Approach to Model Comparison and Policy Evaluation 1480 22.6. Policy Evaluation and Robustness under Model Uncertainty 1485 22.7. Open Questions and Future Research 1499 Appendix 1502 References * 1506 23. Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms 1513 Edward J. Balistreri, Thomas F. Rutherford 23.1. Introduction " 1513 23.2. Trade Theories 1517 23.3. General Equilibrium Formulation 1525 23.4. Computation as a Companion to Theory 1527 23.5. Calibration 1531 23.6. Decomposition Strategy for Computation of Large Models ' 1537 23.7. Applications ' - 1540 23.8. Conclusion 1551 Appendix A: Illustrative Partial Equilibrium Trade Models 1552 Appendix B: Illustrative General Equilibrium Trade Model 1557 Appendix C: Description of the GTAP Version 7-Based CGE Model 1562 References * 1569 24. Market Structure in Multisector General Equilibrium Models of Open Economies 1571 Joseph Francois, Miriam Manchin, Will Martin 24.1. Introduction 1571 24.2. Oligopoly 1573 24.3. Monopolistic Competition " 1583 24.4. Model Selection and Validation. 1595 24.5. Summary, 1597 References 1598 25. Computable General Equilibrium Modeling of Market Access in Services 1601 Elisabeth Christen, Joseph Francois, Bernard Hoekman 25.1. Introduction 1601 25.2. Definitional and Data Issues 1604
Contents ix 25.3. Conceptual Issues 1606 25.4. Implementation Issues 1616 25.5. Models of Services Liberalization 1622 25.6. Modes of Supply and Sector Specificity 1627 25.7. An Example 1628 25.8. Setting Future Research Priorities 1634 25.9. Conclusions 1637 References 1639 26. The Labor Market in Computable General Equilibrium Models 1645 Stefan Boeters, Luc Savard ' ~ 26.1. Introduction 1645 26.2. A Classification of Labor-Market Related Questions 1648 26.3. Labor Supply 1650 26.4. Labor Demand 1676 26.5. Labor Market Coordination 1684 26.6. Welfare Analysis 1706 26.7. Conclusions 1711 References 1712 27. Generational Policy and Aging in Closed and Open Dynamic General Equilibrium Models ^ 1719 Hans Fehr, Sabine Jokisch, Manuel Kallweit, Fabian Kindermann, Laurence J. Kotlikoff 27.1. Introduction 1719 27.2. Preliminaries: Modeling of Aging, Retirement and Idiosyncratic Income Risk 1721 27.3. Closed-Economy Model for Germany, 1728 27.4. Multiregional World Model ' 1755 27.5. Summary of Results 1789 Appendix A: Computational Appendix for the Stochastic Model 1791 Appendix B: Computation of the World Economy's Dynamic Equilibrium 1792 References 1797 Index-Volume IB Index-Volume IA 127 II
Contributors Preface xv xix 1. Introduction 1 Peter B. Dixon, Dale W. Jorgenson - ~" 1.1. Overview 1 1.2. Single-Country Models. 2 1.3. Global Models 9 1.4. Technical Aspects of CGE Modeling: Data, Parameter Estimation, Computation and Validation 12 1.5. Current Cutting-Edge Methodological Areas 16 References 21 2. The MONASH Style of Computable General Equilibrium Modeling: A Framework for Practical Policy Analysis. 23 Peter B. Dixon, Robert B. Koopman, Maureen T. Rimmer 2.1. Introduction 24 2.2. Telling a CGE Story 28 2.3. From Johansen to ORANI 42 2.4. Extending Johansen's Computational Framework: The Mathematical Structure of a MONASH Model *. 52 2.5. Responding to the Needs of CGE Consumers: The Four Closure Approach 80 2.6. Concluding Remarks 94 Appendix: Theoretical Justification for the Johansen/Euler Solution Method 96 References 100 3. Computable General Equilibrium Assessments of Fiscal Sustainability in Norway 105 Erling Holmey, Birger Strom 3.1. Introduction ' ' 1 0 5 3.2. Model Structure 108 3.3. Evaluating Fiscal Sustainability 115 3.4. Sensitivity of the Fiscal Prospects to Variations in Economic Growth and Terms of Trade 121 XI