AN AGE MODEL FOR THE ROMANIAN ECONOMY

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AN AGE MODEL FOR THE ROMANIAN ECONOMY

• Paul de Boer
• Cristina Mohora
• Frédéric Dramais

http//www.ecomod.net A theoretical background
paper is avalailable at the on-site course section
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General features of the model

• Real AGE model
• Static model
• Neoclassical structuralist features

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Steps for building the model

• Developing the theoretical structure of the model
• Constructing the database and adapting the model
  to account for data limitations
• Calibrating the model
• Running the model
• Running policy simulations

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Theoretical structure of the model

• Five economic agents
• Firms
• Household
• Government
• Bank (Savings/investment)
• Rest of the World (RoW)
• All economic agents are assumed to adopt an
  optimizing behavior under the relevant budget
  constraints

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Firms

• Three production sectors
• Agriculture
• Industry
• Services
• Each firm minimizes its production costs at every
  output level, given their production technology

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Structure of production of the agricultural
commodity (1)
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Structure of production of the agricultural
commodity (2)
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Firms
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Household
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Government
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Bank (Savings/investment)
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Rest of World
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Labor market

• The model allows for unemployment
• The relationship between the real average wage
  rate and the unemployment rate is modeled
  according to a wage curve

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Closure (1)

• In our model we have 74 variables and 64
  equations
• We fix the following variables
• Capital supply and time endowment
• Government and foreign savings
• All the transfers between Government, Firms,
  Household and Rest of the World
• Macro closure rule
• Investment and savings balance. Investment is
  assumed to adjust to the available domestic and
  foreign savings

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Closure (2)

• The law of Walras when there are n markets, and
  n-1 of them are cleared, then the nth market is
  cleared as well
• After closing the model we dispose of 64
  variables and equations
• One of the equations is redundant, so that we
  dispose of 63 independent equations gt comment
  out the market clearing of the labor market
• Fixing the numeraire
• PL 1 (net average wage rate)

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The database A SAM for Romania (1997)
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Calibration of the model

• The calibration procedure ensures that the
  parameters of the model are specified in such a
  way that the model will reproduce the initial
  data set (the SAM) as an equilibrium solution
• There are two different types of parameters
• Parameters derived from relevant literature such
  as the elasticity of substitution of a CES
  function
• Parameters to be derived from the SAM such as the
  share parameter and the efficiency parameter of a
  CES function

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Running the model

• The model is implemented in GAMS (General
  Algebraic Modeling System)
• Standard checks are
• Run the model and check if it reproduces the
  benchmark equilibrium data set (the SAM)
• Check the law of Walras
• Check the homogeneity condition if all the
  prices are doubled, the nominal variables should
  double as well, while the real variables should
  remain unchanged

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Policy simulations

• Focus on
• The effectiveness of different fiscal instruments
  on the revenues of the government
• The effects of the reduction of government
  expenditures on the economy

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Policy simulations involving one policy measure

• Policy measures increasing government revenues
• Increase of consumption tax on the agricultural
  commodity
• Increase of tax on capital in the industrial
  sector
• Increase of households income tax
• Policy measures decreasing government
  expenditures
• Decrease of unemployment benefits paid to the
  household
• Decrease of government transfers to the firms

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Increase of consumption tax on the agricultural
commodity
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Example
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Increase of tax on capital in the industrial
sector
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Increase of households income tax
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Decrease of unemployment benefits paid to the
household
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Decrease of government transfers to the firms
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Equal yield tax reform

• Implies a combination of policy measures
• A tax rate is increased, compensated by a
  decrease in another tax rate such that the
  government revenues remain unchanged
• Two policy simulations
• Decrease of tax on imports of the agricultural
  commodity compensating the loss in revenues by an
  increase of consumption tax on the agricultural
  commodity
• Decrease of tax on labor in the agricultural
  sector compensating the loss in revenues by an
  increase in the tax on capital in the same sector

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Decrease of tax on imports of the agricultural
commodity compensating the loss in revenues by an
increase in the corresponding consumption tax
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Decrease of tax on labor in the agricultural
sector compensating the loss in revenues by an
increase in the corresponding tax on capital
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Conclusions

• Both the revenue-oriented measures and the
  expenditure-oriented policies generate a slight
  reduction in output and have a deflationary
  impact
• Equal yield tax reforms
• The decrease of tax on imports compensating the
  loss in revenues by the increase in consumption
  tax generates a slight increase in output (except
  for the agricultural sector) and has an
  inflationary impact
• The decrease of tax on labor compensating the
  loss in revenues by an increase in tax on capital
  generates an increase in output together with a
  deflationary process

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Thank you for your attention!
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Additional simulations