Ana-Isabel Guerra

REVISITING THE ORIGINAL GHOSH MODEL: CAN IT BE MADE MORE PLAUSIBLE?

We reconsider in this paper the alleged implausibility of Ghoshs model and we do so reformulating the model to incorporate an alternative closure rule. Our proposed closure rule is in line with the original allocation rules defined by A. Ghosh. The closure solves, to some extent, the implausibility problem that was pointed out by Oosterhaven, for then value-added is correctly computed and responsive to allocation changes resulting from supply shocks. Some numerical examples illustrate the sectoral and aggregate consistency of the allocation equilibrium.

Applied General Equilibrium: An Introduction

Foreword.- 1 Introduction.- 2 An Overview of General Equilibrium Theory.- 3 A simple General Equilibrium Model.- 4 A General Equilibrium Model with a Government Sector.- 5 Further Extension of the Model: External Sector, Labor Market and Consumption Technology.- 6 Data Base and Model Calibration.- 7 Real-World Examples of Applied General Equilibrium Analysis.- Index.

Budget-constrained expenditure multipliers

Standard expenditure multipliers capture economy-wide effects of new government projects only when financing constraints are not binding. In actual policy-making, however, new projects usually need financing. We show that under liquidity constraints, new projects are subject to two opposite effects: an income effect and a set of spending substitution effects. The former is the traditional, unrestricted, multiplier effect; the latter is the result of expenditure reallocation to uphold effective financing constraints. Unrestricted multipliers will therefore be, as a general rule, upward biased and policy designs based upon them should be reassessed in the light of the countervailing substitution effects. We also propose a novel decomposition of multiplier effects based on internal and external dependencies.

A Non-Possibility Theorem for Joint- Stability in Interindustry Models

Joint-stability in interindustry models relates to the mutual simultaneous consistency of the demand-driven and supply-driven models of Leontief and Ghosh, respectively. Previous work has claimed joint-stability to be an acceptable assumption from the empirical viewpoint, provided only small changes in exogenous variables are considered. We show in this note, however, that the issue has deeper theoretical roots and offer an analytical demonstration that shows the impossibility of consistency between demand-driven and supply- driven models.

On the need to compensate the compensating variation in CGE modeling

ABSTRACT The message of this research is that in the standard calibrated setting of Computational General Equilibrium (CGE) models, the welfare measures typically used to compare benchmark with counterfactuals are numéraire dependent. This evaluation bias affects the compensating variation and the Konüs index of cost of living. We show that the equivalent variation is neutral regarding the choice of value units in calibrated models but would be affected as well in uncalibrated CGE models. We illustrate with a simple example and propose an even simpler theoretical solution to overcome these biases; all that is required to have correct welfare estimates is to compensate normalizing with a suitable price index. This type of correction is necessary to overcome the sometimes blind implementation of welfare measures in numerical general equilibrium analysis. We show that the induced quantitative errors may be substantial providing biased welfare estimates and misleading results.

Additions to the Model: External Sector, Labor Market, Consumption Technology and Welfare Evaluation

The basic model we have thus far developed offers a comprehensive view of the resource allocation process in a closed economy with or without a government sector. These settings, valuable as they are as learning devices, are nonetheless restricted as far as actual policy applications are concerned. We need to further elaborate the model structure and we will do so next by introducing an external sector—hence opening the economy to trading partners—and by allowing some domestic resources, most notably labor, to remain partly unused. These are two phenomena that cannot be ignored in any economy-wide modeling exercise that wants to be capable of handling real-world issues. Finally, we will discuss a limitation of the present version of the model which is more of an empirical and data related nature and has to do with the fact that the goods demanded by households may not correspond to the goods produced by firms.

A General Equilibrium Model with a Government Sector

The simple model outlined in the previous chapter is now going to be adapted to incorporate a government sector. In the world of model-building, it becomes imperative to simplify the full range of economic activities undertaken by the government if we want to keep the model under development at a tractable level. For this reason we will consider the government taking two basic types of decisions, the first one regarding the level and composition of taxation, the second one dealing with its expenditure and transfers program. Taxes will affect consumers and producers plans by modifying the prices they face – via indirect taxes – and their disposable income – both through indirect and direct taxes. On the other hand, government spending will modify final demand faced by firms either through its direct purchase of goods and services or by the induced changes in consumption demand resulting from transferring income to households. In an economy with fixed resources, however, the activities of the government have an unmistakably re-distributive flavor. Income is extracted from the private sector and then poured back in a different mix. Whether these activities promote welfare, or not, is an issue that numerical general equilibrium can suitably address.

Further Extensions of the Model: External Sector, Labor Market and Consumption Technology

The basic model we have thus far developed offers a comprehensive view of the resource allocation process in a closed economy with or without a government sector. These settings, valuable as they are as learning devices, are nonetheless restricted as far as actual policy applications are concerned. We need to further elaborate the model structure and we will do so next by introducing an external sector – hence opening the economy to trading partners – and by allowing some domestic resources, most notably labor, to remain partly unused. These are two phenomena that cannot be ignored in any economy-wide modeling exercise that wants to be capable of handling real-world issues. Finally, we will discuss a limitation of the present version of the model which is more of an empirical and data related nature and has to do with the fact that the goods demanded by households may not correspond to the goods produced by firms.

Real-World Examples of Applied General Equilibrium Analysis

In previous chapters we have described applied general equilibrium analysis in practical terms. In this chapter we begin by presenting a succinct explanation of the history of general equilibrium and the theoretical underpinnings of this type of analysis and models. We then move on to report on actual empirical applications to give the reader a flavor of the potential of AGE modeling.

Data Base and Model Calibration

In Chaps. 3, 4 and 5 we have developed a simple but increasingly complex general equilibrium model. Starting with the standard textbook version of a private, closed economy we showed how the different pieces of the model interact with each other to give rise to a system of equations that capture and describe market equilibrium. The addition of the government and the external sector, as well as the modification of the labor market to allow for unemployment, provided a more realistic picture of an actual economy and laid the grounds for the study of various policy issues. In each of the examples used, however, the specification of the model parameters was arbitrary, except for a choice of units that yielded convenient solution values for prices and output levels.