Andries Brandsma

RHOMOLO: A Dynamic General Equilibrium Modelling Approach to the Evaluation of the European Union's R&D Policies

Brandsma A. and Kancs d’A. RHOMOLO: a dynamic general equilibrium modelling approach to the evaluation of the European Unions R&D policies, Regional Studies. European integration changes the prospects of regional economies within the member states of the European Union in many ways. Cohesion Policy is the European Unions instrument to influence and complement the efforts made at the national level to ensure that the gains of economic integration reach everyone, and there are no regions left behind. This paper presents and applies a spatial general equilibrium model RHOMOLO to assess the impact of regional policy in the European Union. The presented simulation results highlight strengths of the approach taken in RHOMOLO in handling investments in research and development (R&D), infrastructure and spillovers of investments in the innovation capacity of the regions, both of which cannot be captured by models in which the spatial structure is not present.

Assessing policy options for the EU Cohesion Policy 2014-2020

In this paper we analyse the possible impact of Cohesion Policy 2014-2020, putting together the investments supported by EU funding in all NUTS2 regions and running a set of simulations. We make use of RHOMOLO, a spatial CGE model tailored for economic analysis at the subnational level, which is described in the paper. We do so by first considering infrastructure investment, human capital development and innovation climate support, including environmental amelioration, separately and then run a combined simulation of the three categories to give an impression of the pattern and time profile of the overall effect. The results of the simulation show substantial heterogeneity in the effects across the regions, which are not a mere image of the differences in input. The concentration of EU funding on the less developed regions, and on energy saving, innovation and social inclusion in the more developed regions receiving support, could be a fruitful mix for lifting the standards of living in the whole of Europe.

Modelling Migration and Regional Labour Markets: An Application of the New Economic Geography Model Rhomolo

The objective of the present paper is to study the impact of R&D investment on inter-regional labour migration and inter-sectoral labour reallocation in the EU, specifically at regional level. In order to capture important general equilibrium effects, we employ a structural NEG model called RHOMOLO. The RHOMOLO model is a dynamic spatial general equilibrium (DSGE) modelling framework capturing 270 NUTS2 regions in EU-27, and decomposing the economy into 6 sectors. The current base year of RHOMOLO, and to which structural parameters’ estimates are used to calibrate the model, is 2007. As a first step of our analysis we econometrically estimate both (i) within country and (ii) across countries migration flows as a function of relative population, relative real wages per employee, relative unemployment rate and regional connectivity (as proxied by bilateral trade between origin and destination regions normalised by the total of their GDP). Our econometric findings suggest that within-country migration is subject to much the same economic forces as between-country migration, with estimates of the coefficients of relative wages and relative unemployment within in the same range. Secondly, we econometrically estimate the R&D and human capital elasticities, which are key parameters in the semi-endogenous growth module of RHOMOLO to assess the impact of R&D investment on TFP growth. In our next step we produce regional scenarios for R&D investments according to the objective of the Europe 2020 strategy and use them to simulate a shock in R&D investments at the regional levels needed to meet the Europe 2020 strategy. Finally, we combine the previous work together in order to simulate the impact on employment levels of regional R&D investments through the geographically heterogeneous effect that they have on migration flows and on labour supply in each EU region. The geographical distribution of R&D expenditures is shown to affect migration flows as well as employment levels at the regional level by increasing skills in those regions affected by R&D expenditures. Spillover effects on neighbouring regions are also observed.

RHOMOLO-v2 Model Description: A spatial computable general equilibrium model for EU regions and sectors

This report presents the current version of the European Commissions spatial computable general equilibrium model RHOMOLO, developed by the Directorate-General Joint Research Centre (DG JRC) in collaboration with the Directorate-General for Regional and Urban Policy (DG REGIO) to undertake the ex-ante impact assessment of EU policies and structural reforms. The RHOMOLO model has been used with DG REGIO for the impact assessment of Cohesion Policy, and with the European Investment Bank for impact assessment of EU investment support policies. The structure of the model departs from standard computable general equilibrium models in several dimensions. First, it generalises the modelling of market interactions by introducing imperfect competition in products and labour markets. Second, it exploits the advantages of a full asymmetric bilateral trade cost matrix for all EU regions to capture a rich set of spatial market interactions and regional features. Third, it acknowledges the importance of space also for non-market interactions through an inter-regional knowledge spill-over mechanism originating from research and development activities within a country. This report describes the theoretical foundation of RHOMOLO-v2 (v2 = version 2), its mathematical structure, dynamics, data sources and calibration to allow the reader to approach the model and its outputs with a higher degree of awareness of its strength and limitations. Indeed, as for any general equilibrium model with a reasonable level of complexity, in RHOMOLO it is often challenging to track the mechanisms at work after a policy shock and clearly disentangle causes and effects because of the high number of channels of adjustment and the presence of many feedback effects. The purpose of this documentation is thus to provide a compass to the reader to sail safely through its many equations, assumptions and connections.

The Role of Additionality in the EU Cohesion Policies

Additionality is one of the key principles driving the functioning of the EU Cohesion Policies (ECP). The present paper studies how additionality affects the distributional effects of the ECP. Using the example of the firm-level investment support, we analyse the role of additionality and co-financing rate in differently competitive markets. We find that the investment additionality and the level of competition importantly affect the distributional effects of the ECP. Imposing additionality to the ECP investments in a perfectly competitive environment causes distortions in the capital market and leads to lower welfare levels. In contrast, without the enforcement of additionality, the distortions are zero and the support fully benefits firms. In an imperfectly competitive environment the firm-level investment support may increase capital use and may be welfare increasing with and without the enforcement of the investment additionality.