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See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/341277915 slides: Introduction to CGE modelling: Facts and an Instance Presentation · May 2020 DOI: 10.13140/RG.2.2.11212.44164 CITATIONS READS 0 56 1 author: Eli Yucheng Quan Fudan University 7 PUBLICATIONS 0 CITATIONS SEE PROFILE Some of the authors of this publication are also working on these related projects: Firm Performance and Pollution Levy System of China View project CGE modelling and energy policy analysis View project All content following this page was uploaded by Eli Yucheng Quan on 10 May 2020. The user has requested enhancement of the downloaded file.

Introduction An Instance CGE Models References Introduction to CGE modelling Facts and an Instance Eli Yucheng Quan School of Economics Fudan University May 13, 2020 Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References C ONTENTS Introduction 1 An Instance 2 CGE Models 3 Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References F EATURES • First CGE Model: A 22-sector model of Norway (Johansen, L. (1960). A Multisectoral Study of Economic Growth.) • Microeconomic principle : derived from sound microeconomic optimization theory, leading to results with a clear structural or theoretical interpretation (differ from Lieontief IO) . • General Equilibrium Nature : reflect the physical principle of material balance and accouting principle of budgetary balance (Walrus GE, Multiple-agent approach, differ from efficiency-related literature). • Detail and Disaggregation : agents and markets are modeled in an explicit way with as much detail as desired (differ from other structural models). Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References Investment-specific vs Process Innovation in a CGE model of Environmental Policy [2] Claudio Baccianti, Andreas L¨ oschel Feb, 2015 Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References I NTRODUCTION • Motivation : The state of the art of general equilibrium modelling applied to environmental policy rarely treats product and process innovation separately and product quality is, in the best case, exogenous. • What they do : Dynamic multi-sector CGE model with energy, process & product innovation module • Findings : Following an energy tax, aggregate innovation declines but whereas process innovation is reduced, product innovation actually rises. Product-related R&D subsidies are less effective than demand pull policies to reduce aggregate energy intensity. Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References M ODULES AND ASSUMPTIONS IN CGE MODEL : B ASIC SETTINGS • Agents: • Households and final demand • Producers • Government & trade • Modules: added out of need for analysis • Hicks neutral technological change (process innovation) • Investment-specific technological change (product innovation) • Energy Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References P ROCESS & PRODUCT INNOVATION Consumption goods producers: monopolistic firm • Step 1 of maximization problem Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References P ROCESS & PRODUCT INNOVATION Capital goods producers: monopolistic firm • Step 1 of maximization problem • Step 2 of maximization problem: select quality of K and price Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References P ROCESS & PRODUCT INNOVATION • Energy sector: perfectly competitive • Maximization problem • Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References C ONSISTENT DATASET • Basic data: from SAM for the EU27 • R&D expenditures by sector: from OECD ANBERD database for year 2008 • Splitting the R&D statistics into values relative to product and process innovation: rely on the results of the Community Information Survey • Integrate R&D expenditure data into the SAM: Knowledge capital generates in each year a flow of compensation for R&D services that needs to be computed; debits the R&D investment value to the intermediate consumption columns Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References M ODEL CALIBRATION • Data for the base year are used as reference for setting benchmark values of all share parameters in production functions and final demand. • Refer to previous studies (Otto et al. 2008[5] and Baccianti 2013) for calibrating the elasticities of substitution of production and utility functions. Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References S OME RESULTS : E NERGY TAX • Simulate the impact of a 25% proportional tax on the energy price. AGR: Agriculture; EIM: Energy-intensive Manufacturing; NEIM: Low Energy Intensity EI: energy intensity; ED: energy demand; C: aggregate Manufacturing; TrTr: Transport and Trade; SERV: consumption; Q: quality stock of capital goods Services; CAP: Capitcal Good Manufacturing Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References S OME RESULTS : FOUR SCENARIOS • Four scenarios : 15% product R&D subsidy, 15% process R&D subsidy, 25% energy tax, 20% investment subsidy Figure: Ratio of product R&D to process R&D in capital good sector Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References F URTHER DISCUSSION • Human capital is neglected, which may release the negative impact of the energy tax. • Knowledge spillovers are neglected. • Directed technical change. Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References S TEPS IN APPLIED CGE MODELLING Specify dimensions of the model and choose key causal 1 relations. Choose functional forms. 2 Construct consistent data set. 3 Calibration and econometric estimation. The model should 4 be able to replicate real case scenarios. Counter-factual experiments, scenario and impact analysis. 5 Regular updating. 6 Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References F ORMS OF PRODUCTION FUNCTION Table: Regional Studies and Production Functions Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References F ORMS OF PRODUCTION FUNCTION Figure: Porduction structure of climate-embedded GEMPACK Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References A DVANTAGES IN POLICY ANALYSIS A widely applicable methodology in policy analysis. • Policy Relevance: explicitly link values of policy instruments to economic outcomes of interest to policymakers. • Transparency: The links between policy instruments and economic outcomes are traceable and easy to explain. • Timeliness: based on recent, relevant data, since it is to be used on ongoing policy debates. • Estimation and Validation: can be validated for the domain of application of the model. Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References R EFERENCES I • Literature review of existing CGE models[4] • The prevalent CGE textbook [3] • The handbook contains more instances [1] [1] Introduction to the series. In Peter B. Dixon and Dale W. Jorgenson, editors, Handbook of Computable General Equilibrium Modeling SET, Vols. 1A and 1B , volume 1 of Handbook of Computable General Equilibrium Modeling , page ii. Elsevier, 2013. [2] Claudio Baccianti and Andreas L¨ oschel. Investment-specific vs process innovation in a cge model of environmental policy. Technical report, WWWforEurope Working Paper, 2015. Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References R EFERENCES II [3] Mary E. Burfisher. Introduction to Computable General Equilibrium Models . Cambridge University Press, 2 edition, 2017. [4] Ant´ onio Gomes de Menezes, M´ ario Fortuna, Francisco Silva, and Jos´ e Cabral Vieira. Computable general equilibrium models: A literature review. 2006. [5] Vincent M. Otto, Andreas L¨ oschel, and John Reilly. Directed technical change and differentiation of climate policy. Energy Economics , 30(6):2855 – 2878, 2008. Technological Change and the Environment. Quan, 2020 Introduction to CGE modelling

Introduction An Instance CGE Models References THE END View publication stats View publication stats Quan, 2020 Introduction to CGE modelling