A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Martín Cicowiez. (Universidad de La Plata) Jorge Hernández. (Banco Central de Venezuela) Agustín Velázquez. (Banco Central de Venezuela) Roberto Ferrer. (Banco Central de Venezuela) Inter-American Development Bank. The Economic Commission for Latin America and The Caribbean. III Regional Meeting on Computable General Equilibrium Modelling.
Buenos Aires, September 2-3, 2010.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation:
Framework Modules Data Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenge ahead 2
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation:
Framework Modules Data Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 3
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA
Framework
1. We characterized our CGE as a small-open economy model designed to answer issues relative to sectoral performance of the economy, given hypothetical or factual shocks. 2. We aim at providing the best estimations possible to the policy makers about impacts that some public policy would have. 3. Along with DSGE models, we strive to provide references for macroeconomic performance. 4
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation:
Framework Modules Data Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 5
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Modules: Non-rentistic economy. Oil rentistic economy. Rentistic economy with non-neutral money. Rentistic economy with rationing in markets. Rentistic economy with non-neutral money and rational expectations.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation:
Framework Modules Data Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 7
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA – SAM 2005: 23 products and 21 activities. – 2 production factors: L and K (NR to be added) • L splitted into formal and informal and mobile across sectors. • K specific. (Currently working on the possibility of making sluggis).
factors
– 4 sectoral institutions: hh, gov., nog and row. • hh classiffied in 10 income deciles. 8
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation:
Framework Modules Data Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 9
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Today, I shall comment about our non-rentistic CGE model. The model in question shows standard features of small-open-economy type, with certain variations. To wit:
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UN MODELO DE EQUILIBRIO GENERAL COMPUTADO PARA VENEZUELA domestic prices differ according to the demand type (e.g. the value-added tax could be levied on final sales only); labour markets reflect endogenous unemployment, so L markets could adjust through W and U.; tax system is specified in detail;
the CPI might be endogenously determined; closure rules are flexible;
we introduce quotas for both production and imports. 11
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation: Framework Modules Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 12
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Nested production function: TRABAJO
CES
VALOR AGREGADO
PRODUCCION BIEN 1
CAPITAL
LF
PRODUCCION ACTIVIDAD a
LF
INSUMO INTERMEDIO 1
...
INSUMO INTERMEDIO c
VENTAS DOMESTICAS
LF
INSUMOS INTERMEDIOS
PRODUCCION BIEN c
CET
VENTAS EXTERNAS
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA In which the producer problem is typically specified as follow:
Min WF WFDIST 1 TFACT QF f
QF f ,a
f ,a
f ,a
f ,a
f
vaa va s. a. QVAa a f ,a QF f ,a f
1 vaa
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA
The first order condition (FOC) vaa
QFf ,a
a WF WFDIST 1 TFACT f ,a f ,a f
vaa QVAa a va QF f ,a f ,a f
va vaa f ,a
vaa 1
a
QVAa
1 vaa
where the lagrange multiplier takes the VA price, a PVAa . 15
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Parameter calibration of the production function By the FOC we calibrate the distribution and scale parameters, respectively. va f ,a
QF WF WFDIST 1 TFACT QF WF WFDIST 1 TFACT vaa
f ,a
f
f ,a
f ,a
vaa
f ',a
f'
f ',a
f ',a
f'
a
QVAa vaa va f ,a QF f ,a f
1
vaa
Naturally, for the calibration we employ the SAM’s values of the endogenous variables. 16
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA So, how we write the production function in the model? LEVEL 1: accounting equilibrium
QVAa,t ivaa,t QAa,t PAa,t 1 TAa,t URNTQAMAXa,t QAa,t PVAa,t QVAa,t PINTAa,t QINTAa,t cero profit condition QINTAa ,t intaaQAa ,t PINTAa ,t PQDc ,a ,t icaca where ica is the share de i.c of commodity c per unit of intermediate c
input in activity a.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA LEVEL 2: FOC
vaa va QVAa ,t a f ,a QF f ,a ,t f
1
vaa
(FP5)
QFf ,a ,t vaa
PVAa ,t WF WFDIST 1 TFACT f ,t f ,a ,t f ,a ,t
CALTFP vaa vaa f ,a
vaa 1
t a
QVAa ,t ZETA f ,t
(FP6)
WFfcap ,tWFDISTfcap ,a ,t 1 TFACTfcap ,a ,t QFfcap ,a ,t PVAa ,t QVAa ,t
WF
f fncap
WFDISTf ,a ,t 1 TFACTf ,a ,t QFf ,a ,t
f ,t
QINTc , a ,t icac , aQINTAa ,t
(FP6’)
(FP7)
Observe that the variable ZETA becomes endogenous when the L demand gets exogenous, activating the equation F6’, which in turn compute the rental rate of K residually; i.e., employment and wages exogenous are subsidied by K
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA LEVEL 2: PRODUCTION AND IMPORTS QUOTAS
qamaxa ,t QAa ,t
a aqamax
URNTQAMAXa ,t 0
a aqamax
qamax
a ,t
QAa,t URNTQAMAXa,t 0
a aqamax
TOTRNTQAMA X t URNTQAMAX a ,t PAa ,t QAa ,t a
PM c,ac ,t 1 TM c,ac ,t URNTQMMAXc,t .EXRt pwmc,t
PEc,r 1 TEc,r .EXRt PWEc,r We took in consideration that Venezuela might be a big producer (e.g., oil). That’s why the variable PWE appears as endogenous (uppercase) for the commodity c production: c ced (the set ced that shows what commodities have CET); if ced is empty, the variable PWE=pwse is exogenous.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA LEVEL 2: COMPOSED CONSUMPTION GOODS
QQc, ac,t qc, ac q QM M c , ac
qc ,ac c , ac, t
1 qc ,ac q c ,ac c , ac, t
q QD D c , ac
(IM1)
Imperfect substitution between c domestic and imported type CES (Armington)
QQc,ac ,t QMc,ac ,t QDc,ac ,t
(IM1’)
IM1’ activates c commodities that are demanded either domestically or imported, only.
QM c,ac,t PDc,t q QDc,ac,t PM c,ac,t q
M c ,ac D c ,ac
1 1 qc ,ac
(IM2)
Tangence condition (F.O.C.)
PQSc,ac ,t QQc,ac ,t PDc,ac ,t QDc,ac ,t PM c,ac ,t QMc,ac ,t
(IM3)
Supply price of commodity c
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA NIVEL 2: IMPORT QUOTAS
qmmax c ,t QM c ,ac ,t ac
c cqmmax
URNTQMMAXc,t 0 qmmax c ,t QM c ,ac ,t URNTQMMAX c ,t 0 ac
(IM9)
(IM10)
(IM11)
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation: Framework Modules Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 22
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Nested consumption function: DOMESTICO
CES
CONSUMO AGENTE ac (producto c)
IMPORTADO
The representative consumer is modeled by a Stone-Geary utility function (ELES).
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA The consumer problem:
Max QHc,h c,h QH c ,h
c ,h
c
s.a.
.
EH h PQDc,hQH c ,h c
Where QH is the good c consumption good in household h, gamma is survival consumption and beta accounts for the share of c in the household h consumption; PQD
is the demand price of composed goods and EH is the consumption
expenditure of household h. 24
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA FOC
QHc,h c,h
c ,h EH h PQDc ',h c 'h PQDc,h c'
CALIBRATION To calibrate the value of the distribution parameter c,h , it’s necessary estimating income demand elasticity for the commodity c in the household h (leselas(c,h) in the model). The income demand elasticity is defined as
cEH ,h
dQH c ,h EH h dEH h QH c ,h
cEH ,h
c ,h EH h PQDc ,h QH c ,h
c, h cEH, h
PQDc, hQH c, h EH h
The Engels’ aggregation could be written as
PQD
c ,h
QH c ,h cEH ,h
c
EH h
1 and it is employed to ―adjust‖ the income elasticity.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA CALIBRATION To calibrate the parameter c,h ,we should know the value of the Frisch’s parameter (i.e., total consumption / discretionary consumption).
frischh
EH h EH h PQDc ,h c ,h c
So, c,h is
c,h QHc,h
c,h EH h PQDc,h frischh
In the dynamic versión of the model, the value of c,h is updated to reflect the population growth. The values -1 (for the Frisch parameter) and 1 (for the income elasticity) transform a Stone-Geary into a CobbDouglas utility function; The Frisch parameter estimation is usually made considering the relation frisch = -36 *ypc ** (-0.36), —Lluch et al (1973).—where ypc es the income per capita.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA In the model, households’ demand are written as
EH h,t 1 shii i ,t 1 TYh ,t YI h ,t INSSAVh,t i
PQDc,h ,t QH c ,h ,t PQDc,h ,t c ,h ,t c ,h EH h ,t PQDc',h ,t c ',h ,t c' The latter is the FOC.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation: Framework Modules Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 28
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Labour market: unemployment caused by exogenous nominal minimum wage. salario
Ls
WF’
empleo generado por distorsión mercado laboral -institucional
WF
Ld
Ld’ trabajo
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Labour market: wage curve (with exogenous minimum wage). salario
oferta trabajo
demanda trabajo
desempleo
trabajo 30
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA UNEMPLOYMENT
WFREAL f ,t
WF f ,t CPI t
UERAT f ,t 1 phillips f 1 WFREAL00 f UERAT 00 f WFREAL f ,t
WFREALMINf ,t wfrealminf ,t
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA UNEMPLOYMENT
WFREALf ,t WFREALMINf ,t
f fuendog
(U4)
UERATf ,t ueratminf ,t
f fuendog
(U5)
WFREAL
f ,t
WFREALMINf ,t UERATf ,t ueratminf 0
(U6)
(U6) reflects a complementarity condition between real wages and unemployment rate that allows modelling two situations: i) real wage is equal to the minimum real wage and there exists unemployment, or ii) the real wage is higher than the minimum real wage and there no exists unemployment.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation: Framework Modules Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 33
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA DYNAMICS WFAVG f ,t
QF
WFf ,tWFDISTf ,a ,t 1 TFACTf ,a ,t
f ,a ,t
a
QF
(D1)
f ,a ',t
a'
Investment in each period contributes to increase the capital stock in next periods. Hence, at the end of each period, investment is distributed among sectors. (D1) computes the average return of each factor.
SHCAPNEW fcap ,a ,t
WF fcap ,tWFDIST fcap ,a ,t 1 TFACT fcap ,a ,t QF fcap ,a ,t 1 1 QF WFAVG a' fcap ,a ',t fcap ,t
(D2)
The activity weight in the new capiatl stock is reckoned in (D2). The k parameter—varies between zero and one–measures the capital mobility among sectors. When k is zero, investment is allocated following the initial (benchmark) participation (i.e., SAM). When k is positive, investment allocation is done by considering different rental rate of capital.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA DYNAMICS Prices of private and public capital goods by (D3) y (D4), respectively.
PCAPfcap,t iccapc PQDc,inv,t
(D3)
c ,inv
PCAPGfcap,t
iccapg PQD c
(D4)
c ,invg,t
c ,invg
The new capital that each sector receives at the end o each period t is estimated in the equation (D5).
PQD
c ,invg ,t
QCAPNEW fcap ,a ,t SHCAPNEW fcap ,a ,t
PQD
c ,invg ,t
SHCAPNEW fcap ,a ,t
QINVc ,t
c ,inv
PCAPfcap ,t
QINVGc ,t
(D5)
c ,inv
PCAPG fcap ,t
QFfcap ,a,t 1 deprcapfcap QFfcap ,a,t 1 QCAPNEWfcap ,a,t 1
(D6)
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation: Framework Modules Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 36
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA MISCELLANEOUS
REXRt
EXRt DPI t
(MIS1)
fsavmaxt FSAVt
(MIS2)
REXRt REXR0t
(MIS3)
fsavmaxt FSAVt REXRt REXR0t 0
(MIS4)
(MIS2)-(MIS4) might be employed to impose a mixed rule to ROW’s current account. We asume that ROW might finance the domestic economy within certain limits. When a predetermined limit is reached, the exchange rate becomes endogenous to balance the current account.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA MISCELLANEOUS
MONEYt PQDc,ac,t QQc,ac,t c ,ac
(MIS5)
The (MIS5) equation is the “cash in advance” condition (Clower, 1967) that might be used to determine the CPI by exogenizing the amount of MONEY. Thus, we might be able to study the impacts of exogenous changes in the CPI This is, we endogenized CPI and exogenized MONEY.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation: Framework Modules Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 39
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA CLOSURES FACTOR MARKETS: mobile or specific. Sluggish factor to be developed GOVERMENT: three alternatives with constant tax rates. i.
Real public outlays exogenous whereas government savings are endogenous,
ii.
Real public expenditure endogenous and goverment savings exogenous,
iii.
Both the public expenditure and savings endogenous but government expenditure is constant in the absorption
In addition, a tax rate could be endogenized to keep public consumption and goverment savings constant. ROW: Two alternatives i.
ROW savings fixed REXR endogenous
ii.
ROW savings flexible REXR exogenous
PRIVATE SAVINGS AND INVESTMENTS: three alternatives. i.
Inv. exogenous-MPS endogenous(investment driven)
ii.
Inv. endogenous -MPS exogenous (saving driven)
iii.
Inv. as a fixed proportion of the absorption whereas Inv y MPS get flexible.
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA EXPERIMENT:
1. Oil increase in 45% 2. RXR depreciation in 2.3% 3. Real public expenditure increase in 29% 4. Real transfer gov-hhd increase in 24% 5. Public investment increase in the construction sector in 30%
Closures: 1. RowClos0= REXR flexible for all with the exception of 2. 2. GovClos0= 1, GSAV flexible-GADJ fixed -Taxes and GInv.also fixed; 3. S-IClos0= 1, IADJ fixed, MPSADJ flexible
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A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Data assumptions: 1. Elasticity of substitution CES VA is 1.05 2. Income-demand elasticity equal to 1 3. We assigned -1 for the Frisch parameter 4. CET equal to 4 5. Armingtons range between 1.9 and 8.3 (we are working on estimating these elasticities econometrically) 6. Initial unemployment rate of 10% 7. Minimum unemployment rate for classic endogenous unemployment of 2.5% 8. Wage unemployment elasticity of -0.13.
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SIMULATIONS’ IMPACT OVER MACROECONOMIC AGGREGATES Real GDP % deviation with respect basecase forecast
0,12 0,1 0,08 Real GDP
0,06 0,04 0,02 0 2005
2006
2007
2008
2009 43
SIMULATIONS’ IMPACT OVER MACROECONOMIC AGGREGATES Output precentage variation w.r.t. the basecase forecast Year 2005 2006 2007 2008 2009
(considering all shock combinations) a-comer a-const a-extracpetrol a-maquin a-otrmanuf a-otrservic a-refpet a-vehic -0,18 2,93 0,03 -0,33 -0,17 -0,17 0,29 -0,25 0,07 0,01 0,10 0,03 0,08 0,08 0,07 0,07 0,07 0,01 0,09 0,03 0,07 0,07 0,07 0,06 0,06 0,01 0,09 0,03 0,07 0,07 0,06 0,06 0,06 0,01 0,08 0,02 0,06 0,06 0,06 0,05
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SIMULATIONS’ IMPACT OVER MACROECONOMIC AGGREGATES
Real GDP Percentage change with respect to the basecase forecast Year 2005 2006 2007 2008 2009
govcon-1 0,664 -0,016 -0,014 -0,013 -0,013
(Per simulation) pwe-rowclos1 qinvg-1 1,867 0,097 -0,120 0,074 -0,112 0,069 -0,105 0,064 -0,098 0,060
rxr-2 trnsfr-1 0,189 0,073 -0,015 -0,006 -0,014 -0,005 -0,013 -0,005 -0,012 -0,005
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SIMULATIONS’ IMPACT OVER MACROECONOMIC AGGREGATES
Welfare impact in the three lowest income deciles (per simulation) Billions of Bs Simulation h-hhd1* h-hhd2* h-hhd3* govcon-1 1,327 0,334 1,611 pwe-rowclos1 -5,125 4,918 1,289 qinvg-1 0,248 0,056 0,253 rxr-1 -1,649 0,569 -0,663 trnsfr-2 1,714 1,043 1,960 * The lowest income deciles account for 30% of total population and earn 9% of total annual income per capita
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SIMULATIONS’ IMPACT OVER MACROECONOMIC AGGREGATES Households expenditure variation w.r.t. basecase forecast (the three lowets income deciles)
1 0,8 0,6
h-hhd1 h-hhd2 h-hhd3
0,4 0,2 0 -0,2 2005
2006
2007
2008
2009 47
SIMULATIONS’ IMPACT OVER MACROECONOMIC AGGREGATES Real exchange rate behavior w.r.t. basecase forecast (positive variation means depreciation)
2005
2006
2007
2008
2009
0 -0,05 -0,1 -0,15 -0,2 -0,25 -0,3
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SIMULATIONS’ IMPACTS OVER EMPLOYMENT AND REAL WAGES (evolution w.r.t. base case forecast)
2 1,8 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 0
Rwage Emp_Rate
2005
2006
2007
2008
2009 49
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA Topics for today’s presentation:
Framework Modules Data Specificities Nested production function Nested consumption function Labour market Dynamics Miscellaneous treaments Closures and experiment Challenges ahead 50
A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA DATA: 1. Econometric estimation of parameters in an economy in transition 2. Investment-Savings treatment: a. Dispositions (negative investments) b. Investment by activities rather that by institutional sectors c. Negative savings in households MODELLING: 1. Cash-in-advance treatment doesn’t yield the expected results: Increase in nominal wages are not reflected in CPI increase. 2. What’s ideal size of this type of model? The model tends to grow in size to answer complex questions: e.g. effects of nominal variables changes in real ones. 51
