Jean Mercenier

On Turkey's Trade Policy: Is A Customs Union with Europe Enough?

Abstract Turkey has decided to harmonize its tarification structure with that of the European Union. For the countrys authorities, this move to a Customs Union is only meant to be the first step toward integration in the European Union. There are signs, however, that political opposition to the governments procompetitive stance may be strong enough to block any further move toward fuller trade liberalization. We show, using applied intertemporal GE analysis, that to be welfare improving, the trade reform would have to be pursued further and nontariff barriers on European trade removed. Failure to do so could be more detrimental to domestic welfare than no reform at all.

Discrete-Time Finite Horizon Appromixation of Infinite Horizon Optimization Problems with Steady-State Invariance

The computation of large-scale nonlinear intertemporal optimization problems requires time aggregation. A procedure generally adopted is shown to introduce a dependency of the solution steady state to a specific choice of sequence of time intervals. The authors establish necessary and sufficient conditions to avoid this dependency. The result is a considerable improvement in the numerical accuracy of the time-aggregated approximation. The conditions apply to a broad class of models and prove useful in large-scale applied general-equilibrium modeling. This conclusion is highlighted by a comparison with a spectral-projection method using optimal orthogonal collocation as in K. L. Judd (1992). Copyright 1994 by The Econometric Society.

Can "1992" reduce unemployment in Europe? On welfare and employment effects of Europe's move to a single market

Abstract This paper provides a general-equilibrium investigation of welfare and employment consequences of Europes move to a unified market, using a static multicountry, multisector applied general equilibrium model with imperfect competition, increasing returns to scale and product differentiation at the firm level. Following Smith and Venables (1988), “Europe 1992” is interpreted as the elimination of the possibility for oligopolistic firms to price-discriminate between client countries within the Community. Experiments are performed under alternative noncompetitive behavior (Bertrand-Nash vs Cournot-Nash), industry structure (fixed vs variable number of firms) and wage determination mechanism (flexible wages with fixed employment vs rigid real wages with endogenous unemployment). The results suggest that with flexible wages the gains for consumers should prove modest even though unambiguously positive. In contrast, with the alternative wage setting arrangement, the “1992” program could provide a significant impetus to employment recovery in Europe: productivity gains would then be absorbed by employment creation rather than wage increases, so that the reduction in unemployment is estimated between 2.7 and 0.5 percent depending on the country considered (with an EEC average of 1.5 percent) and welfare gains range between 2.1 and 0.4 percent. The paper also provides some methodological innovations that may prove useful to applied general equilibrium modelers not interested by “Europe 1992.”

Nonuniqueness of solutions in applied general equilibrium models with scale economies and imperfect competition

SummarySince the publication of Harris (1984), applied general equilibrium models with imperfect competition and economies of scale have been extensively used for analyzing international trade and development policy issues. Their attractiveness comes from their offering a natural framework for testing the empirical relevance of numerous propositions from the industrial organization and new trade theoretical literature. Their role in the recent debates on the North American Free Trade Agreement demonstrates their potential importance in policy analysis. This paper warns model builders and users that considerable caution is however needed in interpreting the results and in deriving strong policy conclusion from these models: it is shown that in this generation of applied general equilibrium models, nonuniqueness of equilibria is not a theoretical curiosum, but a potentially serious problem. Disregarding this may lead to dramatically wrong policy appraisals.

A criterion for time aggregation in intertemporal dynamic models

Nonlinear intertemporal general equilibrium models are hard to solve because of the dimensionality of the optimization problem involved. The computation of intertemporal general equilibria therefore calls for time-aggregation assumptions. A question then immediately arises: what criterion should one use to choose a sequence of possibly unequal time intervals in order to reduce the dimensionality of the optimization problem, yet keep under control the errors resulting from the numerical approximation of a continuous time process by a discrete time process? We propose one such criterion based on the current value of capital, which exploits near steady-state optimal dynamics. We show, using a parameterized version of the standard Ramsey—Koopmans—Cass model of optimal growth, that it outperforms alternative criterions used in the literature.

A Plea For Greater Attention on the Data in Policy Analysis

Abstract The technical difficulties associated with building and solving applied general equilibrium (GE) models seem to have distracted our attention from the data. In this article, we forcefully stress that whatever the sophistication of the GE analysis, it is only worth the quality of the supporting data it utilizes. We first highlight an example of a flagrant flaw in officially published input–output data (factor–income shares) by an LDC (Turkey), which many researchers use without question. We then make use of an applied GE model to evaluate the dynamic gains for Turkey from currently debated trade policy options and compare the predictions using conservatively adjusted, rather than official, data on factor shares. We show that the predicted welfare gains are not only of a different order of magnitude, but in some cases, of a different sign; hence, suggesting contradictory policy recommendations.

The sensitivity of developing countries to external shocks in an interdependent world

Abstract North-South interdependence is illustrated by means of a general equilibrium model, in which the rural and urban sectors are treated entirely separately and urban real wages are downward rigid. We explain why such an approach may be more meaningful for long-run analysis than one that stresses the role of demand. The models properties are illustrated by a theoretical analysis based on a simplified version of the system, and by simulations based on assumptions made by World Bank Staff in the 1983 World Development Report.

How Prescribed Policy Can Mislead when Data Are Defective: a Follow-Up to Srinivasan (1994) Using General Equilibrium

We highlight an example of considerable bias in officially published input-output data (factor-income shares) by an LDC (Turkey), which many researchers use without question. We make use of an intertemporal general equilibrium model of trade and production to evaluate the dynamic gains for Turkey from currently debated trade policy options and compare the predictions using conservatively adjusted, rather than official, data on factor shares. We show that the predicted welfare gains are not only of a different order of magnitude, but in some cases, of a different sign, hence, suggesting contradictory policy recommendations.

OPTIMAL EXCHANGE RATE STABILIZATION IN THE DM ZONE: A REVEALED PREFERENCE APPROACH

Abstract We develop a model of the short-term behavior of the monetary authorities of a small country that faces the two conflicting objectives of a ‘rate constant policy’, by which exchange rates and interest rates are held constant vis-a-vis a major trading partner, and an ‘aggregates constant policy’, by which the money supply is tight to a stationary (relative to foreign) level. The Central Banks action is modelled as the optimal choice resulting from this intertemporal trade-off. Expectations are assumed rational. The model is formulated so as to avoid the time inconsistency of optimal plans that arises when the optimizing agent is a dominant player. Both the optimal money supply rule and the inter-temporal utility function of the policy maker can be estimated econometrically by maximum likelihood techniques. The model is applied to the Belgian and Dutch economy, with Germany playing the role of the dominant partner. The econometric results suggest that the behavioral model has strong empirical relevance for these countries, hence providing an endogenous optimal stabilization rule that may be used in empirical macroeconomic models.

Applying General Equilibrium.

The aim of this book is to make more widely available a body of recent research activity that has become known as applied general equilibrium analysis. The central idea underlying this work is to convert the Walrasian general equilibrium structure (formalized in the 1950s by Kenneth Arrow, Gerard Debreu and others) from an abstract representation of an economy into realistic models of actual economies. Numerical, empirically based general equilibrium models can then be used to evaluate concrete policy options by specifying production and demand parameters and incorporating data reflective of real economies. Shoven and Whalley describe all aspects of developing applied general equilibrium models, including developing an appropriate equilibrium structure, calibrating the model, compiling counterfactual equilibria, and interpreting results. The authors contend that the Walrasian general equilibrium model provides an ideal framework for appraising the effects of policy changes on resource allocation, assessing who gains and who loses, and the policy impacts not well covered by empirical macro models. The applications in the book illustrate a number of ways in which fresh insights are provided in longstanding policy controversies.