Maureen T. Rimmer

Dynamic general equilibrium modelling for forecasting and policy : a practical guide and documentation of MONASH

Preface. Chapter 1: Aims, Background, Innovations and Presentation. Introduction. Background and Innovations. Presentation, Computer Code, Reading Strategy and Themes. Chapter 2: An Illustrative Application of MONASH: the Australian Motor Vehicle Industry from 1987 to 2016. Introduction. Historical and Decomposition Simulations: The Australian Motor Vehicle Industry from 1987 to 1994. Forecast Simulation: Prospects for the Australian Motor Vehicle Industry, 1998 to 2016. A Policy Simulation: The Effects of Reductions in the Tariff on Motor Vehicles. Policy Implications and Concluding Remarks. Appendix: The Derivation of the Formulas for Analysing the Difference Between GDP Paths in Alternative Simulations. Chapter 3: Mathematical Structure, Solution Algorithm and Computer Implementation: An Overview. Introduction. Overview of the Mathematical Structure of MONASH and Introduction to the Johansen/Euler Solution Method. The Input-Output Database and the Initial Solution. Evaluation of the Coefficients in Linear Systems such as (11.2) and (11.12). Overview of the GEMPACK Computations for the MONASH Model. Chapter 4: The Theory of the MONASH Model. Introduction. A Schematic Version of the MONASH Model. Results of Optimizing Decisions. Demands for Exports. Indirect Taxes. Definitions of Macro Variable: Interpretation of Divisia Indexes. Capital-Supply Functions, Rates of Return and Forward-Looking Expectations. Computational Strategy for Decomposition Simulations: Halfway Databases. Equations for Facilitating Historical and Forecast Simulations. Wage Adjustment and Welfare Measures in Policy Simulations. The Public-Sector Account, the Current Account and the Household Account. Appendix: CRESH Production Functions and CRETH Transformation Frontiers. Appendix: The Theory Underlying the Demand Equations for Traditional Exports. Appendix: The Levels representation of Price and Quantity Indexes in MONASH. Chapter 5: Developing the MONASH Closures. Introduction. The Decomposition closure (Third Column of Table 30.1). Developing the Historical Closure (Fourth Column of Table 30.1). Developing the Forecast Closure (Second Column of Table 30.1). Developing the Policy Closure (First Column of Table 30.1). MONASH Closures: Concluding Remarks. Chapter 6: Extensions, Progress and the Future. Introduction. Generating Results for Sub-National Regions. Generating Results for Detailed Occupations. Generating Output Results at a Sub-Input-Output Level. Generating Distributional Results: The Real Incomes of Many Types of Households. Quantifying Labour Market Adjustment Costs. Progress and the Future. References. Author Index. Subject Index.

Saving the Southern Murray-Darling Basin: The Economic Effects of a Buyback of Irrigation Water*

We use TERM-HO in analysing the effects of the Government buying back water from irrigators in the Southern Murray-Darling Basin (SMDB) and thereby increasing river flows. TERM-HO is a dynamic multiregional computable general equilibrium model containing water accounts. Controversially, our results suggest that buyback would increase economic activity in SMDB. Although a scheme of environmentally useful size would sharply increase the price of irrigation water, there would be little effect on aggregate SMDB farm output. Instead, farm resources would be reallocated between activities. Because farmers are owners of water rights, they would benefit from the price increase induced by buyback.

The Economy-Wide Effects in the United States of Replacing Crude Petroleum with Biomass

Part of President Bushs energy policy is to encourage research aimed at reducing the cost of biomass-based motor fuels to become competitive with petroleum-based fuels. We use a dynamic, CGE model to investigate the economy-wide implications of successful implementation of this policy. We find in the long-run, 2020, that the U.S. would experience significant benefits arising from: (1) substitution of biomass whose price is likely to fall in the long-run for crude petroleum whose price is likely to rise; (2) reduction in the world price of crude petroleum; (3) increased employment; and (4) higher export prices.

Changes in Technology and Preferences: A General Equilibrium Explanation of Rapid Growth in Trade

We use a computable general equilibrium model in an explanation of the recent rapid growth in Australias trade, particularly intra-industry trade. Relative to previous studies of trade growth based on multiple regression analysis, our approach allows us to: (i) work at a detailed industry level; (ii) use primary variables to represent changes in technology and preferences rather than proxies; and (iii) use a framework based on explicit microeconomic foundations. We find that most of the growth in Australias trade relative to GDP is explained by changes in technology and preferences. Copyright 2000 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

Changes in Indirect Taxes in Australia: A Dynamic General Equilibrium Analysis

Over the last thirty years, the effects of indirect taxation changes have been analysed using comparative static general equilibrium models. We use a new method to analyse current changes in Australia’s indirect taxes: dynamic computable general equilibrium modelling. Comparative static methods compare the situation in a given year (usually unspecified) with and without a policy change. The dynamic method shows the effects of a policy change through time. Comparative static methods are usually restricted to estimates of long‐run changes in allocative efficiency. The dynamic method provides information not only on efficiency but also on adjustment processes, including variations in employment. With our dynamic method, the effects of policy changes are analysed as deviations from explicit forecasts. We find that these forecasts are important for the policy results. For Australia’s current set of indirect tax changes, our main conclusions are (i) the short‐run employment effects depend critically on the wage response; (ii) merchandise exporters benefit but tourism is harmed; and (iii) the long‐run welfare effectsare likely to be negative, reflecting a decline in the terms of trade and increased compliance costs.

Effects on the U.S. of an H1N1 Epidemic: Analysis with a Quarterly CGE model

We simulate the effects of a hypothetical H1N1 epidemic in the U.S. using a quarterly CGE model. Quarterly periodicity allows us to capture the short-run nature of an epidemic. We find potentially severe economic effects in the peak quarter. Averaged over the epidemic year, the effects are considerably damped. Our results indicate that the macroeconomic consequences of an epidemic are more sensitive to demand-side effects, such as reductions in international tourism and leisure activities, than to supply-side effects, such as reductions in productivity. This suggests that demand stimulus policies might be an appropriate economic response to a serious epidemic.

Economy-Wide Effects of Reducing Illegal Immigrants in U.S. Employment

We use an economy-wide model to analyze the effects of three broad programs to reduce illegal immigrants in U.S. employment: tighter border security; taxes on employers; and vigorous prosecution of employers. After looking at macroeconomic industry and occupational effects, we decompose the welfare effect for legal residents into six parts covering changes in: producer surplus and illegal wage rates; skilled employment opportunities for natives; aggregate capital; aggregate legal employment; the terms of trade; and public expenditure. The type of program matters. Our analysis suggests a prima facie case in favor of taxes on employers. (JEL J61, C68)

Validating a Detailed, Dynamic CGE Model of the USA

Computable general equilibrium (CGE) models can be used to generate detailed forecasts of output growth for commodities/industries and thereby provide baselines from which to calculate the effects of policy changes. In this article, we assess a CGE forecasting method that has been applied in policy analyses in the USA and Australia. Using data available up to 1998, we apply the method with the USAGE model to generate ‘genuine forecasts’ for 500 US commodities/industries for the period 1998–2005. We then compare these forecasts with actual outcomes and with alternate forecasts derived as extrapolated trends from 1992 to 1998.

A New Specification of Labour Supply in the MONASH Model with an Illustrative Application

MONASH is a dynamic general equilibrium model of the Australian economy. This article describes a new labour-market specification for MONASH in which people are allocated in year t to categories according to their labourmarket activities in year t – 1. People in each category plan their labour supplies by solving an optimisation problem. Via these problems, we introduce the assumption that people in employment categories supply labour more strongly to employment activities than do people in unemployment categories. Thus we find that employment-stimulating policies in t – 1 increase labour supply in t by shifting the composition of the labour force in t in favour of employment categories and away from unemployment categories. We illustrate this idea by using MONASH to simulate the Dawkins proposal to combine a freeze on award wage rates with tax credits for low-wage workers in low-income families. We find that the Dawkins policy would generate a significant short-run increase in employment. With the increase in employment generating an increase in labour supply, the employment benefits of the policy would persist over many years. However, in the long run, we would expect the effect of the policy on aggregate employment to be small and to depend on how the policy affected the ratio of real after-tax wage rates to unemployment benefits.

Modern Trade Theory for CGE Modelling: The Armington, Krugman and Melitz Models

This paper is for CGE modelers and others interested in modern trade theory. The Armington specification of trade, assuming country-level product differentiation, has been central to CGE modelling for 40 years. Starting in the 1980s with Krugman and more recently Melitz, trade theorists have preferred specifications with firm-level product differentiation. We draw out the connections between the Armington, Krugman and Melitz models, deriving them as successively less restrictive special cases of an encompassing model. We then investigate optimality properties of the Melitz model, demonstrating that a Melitz general equilibrium is the solution to a global, cost-minimizing problem. This suggests that envelope theorems can be used in interpreting results from a Melitz model. Next we explain the Balistreri-Rutherford decomposition in which a Melitz general equilibrium model is broken into Melitz sectoral models combined with an Armington general equilibrium model. Balistreri and Rutherford see their decomposition as a basis of an iterative approach for solving Melitz general equilibrium models. We see it as a means for interpreting Melitz results as the outcome of an Armington simulation with additional shocks to productivity and preferences variables. With CGE modelers in mind, we report computational experience in solving a Melitz general equilibrium model using GEMPACK.