Bayesian Estimation of Regional Production for CGE Modeling

Abstract Computable general equilibrium (CGE) models are often criticized for using restrictive functional forms and relying on external sources for parameter values in their calibration. CGE modelers argue that in many instances reliable econometric estimates of important model parameters are unavailable because they must be estimated using small numbers of time‐series observations. To address these criticisms, this paper uses a Bayesian approach to estimate the parameters of a translog production function in a regional computable general equilibrium model. Using priors from more reliable national estimates, and parameter restrictions required by neoclassical production theory, estimation is done by Markov chain Monte Carlo simulation. A stylized regional CGE model is then used to contrast policy responses of a Cobb‐Douglas specification with those from the estimated translog equation.     

THE ROLE OF DEFENSE CUTS IN THE CALIFORNIA RECESSION COMPUTABLE GENERAL EQUILIBRIUM MODELS AND INTERSTATE FACTOR MOBILITY*

ABSTRACT. This study develops a computable general equilibrium (CGE) model of California to examine the impact of recent defense cuts on the state's economy. The study demonstrates use of a CGE model to examine the sensitivity of regional economy models to assumptions about factor migration. Model variants include input-output and closed economy models as limiting cases. The results show that the California economy is sensitive to defense cuts. The multiplier relating the impact of defense cuts to state product ranges from one to almost five, depending on the degree of interstate factor mobility.     

The Local Implications of Major Job Transformations in the City: A Spatial Microsimulation Approach

The changing dynamics of regional and local labor markets during the last decades have led to an increasing labor market segmentation and socioeconomic polarization and to a rise of income inequalities at the regional, urban, and intraurban level. These problems call for effective social and local labor market policies. However, there is also a growing need for methods and techniques capable of efficiently estimating the likely impact of social and economic change at the local level. For example, the common methodologies for estimating the impacts of large firm openings or closures operate at the regional level. The best of these models disaggregate the region to the city (Armstrong 1993; Batey and Madden 1983). This paper demonstrates how spatial microsimulation modeling techniques can be used for local labor market analysis and policy evaluation to assess these impacts (and their multiplier effects) at the local level‐to measure the effects on individuals and their neighborhood services. First, we review these traditional macroscale and mesoscale regional modeling approaches to urban and regional policy analysis and we illustrate their merits and limitations. Then, we examine the potential of spatial microsimulation modeling to create a new framework for the formulation, analysis and evaluation of social and local labor market policies at the individual or household level. Outputs from a local labor market microsimulation model for Leeds are presented. We show how first it is possible to investigate the interdependencies between individual's or households labor market attributes at the microscale and to model their accessibilities to job opportunities in different localities. From this base we show how detailed what‐if microspatial analysis can be performed to estimate the impact of major changes in the local labor market through job losses or gains, including local multiplier effects.     

MODERN MACROECONOMICS AND REGIONAL ECONOMIC MODELING*

ABSTRACT Despite a history of regional economic models being patterned after their national counterparts, modern macroeconomic methodology has yet to be fully embraced by regional scientists. In this paper, I argue that modern macroeconomic methodology has much to offer the field of regional economic modeling. For one, the empirical strategies used in implementing dynamic stochastic general equilibrium models provide insights into how regional computable general equilibrium models could be better parameterized and empirically verified. In addition, the structural macroeconomic approach more generally could be used to construct structural regional policy analysis models for use as alternatives to traditional regional models.     

The Macro‐Economic Effects of Directed Credit Policies: A Real‐Financial CGE Evaluation for India

The effectiveness of directed credit programmes as an instrument for economic development is the subject of considerable debate. However, the focus of this debate is almost exclusively on the intra‐sectoral effects of directed credit and its adverse effects on financial sector performance, neglecting possible spillover effects on demand, production and investment in the rest of the economy. This article tries to fill this gap by examining the macro‐economic effects of directed credit in India with the help of a novel real‐financial computable general equilibrium (CGE) model. Focusing on credit rather than money, the model goes beyond earlier modelling approaches by (1) incorporating directed credit policy and credit rationing; (2) recognizing the dual role of credit for working capital and investment; and (3) allowing for switches between credit‐constrained, capacity‐constrained and demand‐constrained regimes. The results from short‐ and medium‐term simulation experiments with the model indicate that, when credit market failures result in rationing as in India’s agricultural and small‐scale industrial sectors, the macro‐economic effects of directed credit are likely to be significant and positive.     

Local Government Portfolios and Regional Growth: Some Combined Dynamic CGE/Optimal Control Results

A theoretical policy model is presented that combines regional dynamic CGE modeling and optimal control to explore the role of local government taxation and expenditure in enhancing regional growth. It contributes to the regional CGE literature by explicitly solving for an optimal policy and augments earlier regional optimal control models by adding endogenous optimization of producer and consumer agents in response to endogenously determined prices. Results of three policy regimes are analyzed in terms of gains in the objective function, impacts on income inequality, and sensitivity to model parameterization.     

Regional development and technology policies: Some lessons from the German experience

The development of economic, ecological, social, cultural and political conditions has a lasting influence on the development of individual regions and economic areas, and is in turn influenced by them. Background conditions in Germany have changed over the last few years, with reunification and the upheavals in Eastern Europe, the prospective completion of the Singh European Market and the increasingly insistent new challenges in the areas of the environment and transport. This paper gives some examples of the changes taking place in some of these background conditions, and discusses their foreseeable future regional impacts in the FRG. In the last 10 years, Baden‐Württemberg in south‐west Germany has been considered as one of the most successful examples in Europe of regional structural adaptation combined with a dynamic innovation system. The characteristics of the economic development of this region and their causes are dealt with.     

The Regional Economic Impact of an Earthquake: Direct and Indirect Effects of Electricity Lifeline Disruptions

This paper develops a methodology to estimate the regional economic impacts of electricity lifeline disruptions caused by a catastrophic earthquake. The methodology is based on specially designed input-output and linear programming models. A simulation of a major earthquake in the New Madrid Seismic Zone near Memphis, Tennessee, indicates the potential production loss over the recovery period could amount to as much as 7 percent of gross regional product. Reallocation of scarce electricity across sectors could reduce the impacts substantially. Additionally, an improved restoration pattern of electricity transmission substations across subareas could reduce losses even more.     

A LONG-RUN INTERPRETATION OF REGIONAL INPUT-OUTPUT ANALYSIS*

ABSTRACT. Regional input-output (I-O) analysis is traditionally motivated by a short-run, extreme Keynesian vision of markets. In this paper we argue that an appropriately formulated, investment-endogenous, I-O system replicates the long-run equilibria of a wide range of regional models, many of which do not operate as I-O systems in the short run. In particular, we use a computable general equilibrium (CGE) framework to illustrate the impact of an aggregate demand disturbance on an I-O and standard neoclassical model. When run forward over a number of periods, the results from the capacity-constrained neoclassical model asymptotically approach the I-O outcome. We use sensitivity analysis to examine the speed of adjustment of the neo-classical system and investigate barriers to the attainment of the I-O result.     

A NEW APPROACH TO MODELING THE IMPACT OF DISRUPTIVE EVENTS

This paper develops a new methodology to predict the interregional and interindustry impacts of disruptive events. We model the reactions of economic agents by minimizing the information gain between the pre‐ and postevent pattern of economic transactions. The resulting nonlinear program reproduces, as it should, the pre‐event market equilibrium. The methodology is tested further by means of a comparison of this base scenario with two regional production shock scenarios and two interregional trade shock scenarios. The outcomes show a plausible combination of partially compensating demand, supply, and spatial substitution effects, which justifies the further development, testing, and application of this new approach.     

TRANSPORTATION COSTS IN REGIONAI,MODELS OF FOREIGN TRADE: AN APPLICATION TO CANADA-U.S. TRADE*

ABSTRACT. This paper outlines some arguments about the role of transportation costs in determining the welfare consequences of trade restrictions. The analysis uses a computable general equilibrium (CGE) model and presents the relevant features for trade analysis. The model has two alternative spatial formulations. In the first, all production and trade occur at one point, while in the second the regions are separated by distance. The calculated effects of a unilateral tariff increase are compared using the CGE model with the “point” and “distance” formulation. While the presence of transportation costs is crucial to some sectoral trade and production results, most welfare results are relatively insensitive to the spatial structure of the model.     

From May to October: Reassessing the 1968 Generation

Since the early 1980s, France has transformed its pattern of economic policy‐making from a state‐led or dirigiste approach to a more market‐oriented one and generated a new set of dynamics between French business and government at regional, national, and European levels. Business has become more independent of the central state as a result of deregulation, privatisation, regional integration, and Europeanisation, more interdependent as a result of cross‐shareholdings, and more international in consequence of cross‐border mergers and acquisitions. State interventionism, where it remains, has become more circumscribed and less directive, targeting firms only in strategic areas or in trouble.     

Talent,technology and tolerance in Canadian regional development

This article examines the factors that shape economic development in Canadian regions. It employs path analysis and structural equation models to isolate the effects of technology, human capital and/or the creative class, universities, the diversity of service industries and openness to immigrants, minorities and gay and lesbian populations on regional income. It also examines the effects of several broad occupations groups—business and finance, management, science, arts and culture, education and health care—on regional income. The findings indicate that both human capital and the creative class have a direct effect on regional income. Openness and tolerance also have a significant effect on regional development in Canada. Openness towards the gay and lesbian population has a direct effect on both human capital and the creative class, while tolerance towards immigrants and visible minorities is directly associated with higher regional incomes. The university has a relatively weak effect on regional incomes and on technology as well. Management, business and finance and science occupations have a sizeable effect on regional income; arts and culture occupations have a significant effect on technology; health and education occupations have no effect on regional income.     

Micro-level assessment of regional and local disaster impacts in tourist destinations

ABSTRACT

The tourism sector faces severe challenges due to the economic impacts from changing natural environments as seen with the increased frequency of natural disasters. Therefore, analyses of disaster impacts models are necessary for managing successful tourism recovery. Typically, disaster assessments are conducted on a countrywide level, which can lead to imbalanced recovery processes, and a distorted distribution of recovery financing or subsidies. We address the challenges of recovery using the tourism disaster management framework by Faulkner. To calculate precise damage assessments, we develop a micro-level assessment model to analyze and understand disaster impacts at the micro-level supporting tourism recovery in an affected destination. We examine economic consequences of a disaster at a small regional scale arguing recovery from a natural disaster is more difficult in individual areas because of differences in geographic location or infrastructure development. The island of Dominica is chosen as an example for the model using statistical data from the tourism sector to outline and detail the consequences of a disaster specifically for communities. The results highlight the importance of damage assessments on a small-scale level, such as communities in order to distinguish between individual regions facing severe changes for resident livelihoods and the local tourism sector. We argue that only after identifying regional impacts it is possible to apply adequate governmental subsidies and development strategies for a country's tourism sector and residents in a continuously changing environment in the hopes of mitigating future financial losses and future climate change impacts.     

THE CONCEPTUAL LINKS BETWEEN RECREATION SITE DEVELOPMENT AND REGIONAL ECONOMIC IMPACTS*

ABSTRACT. Assessing regional economic impacts of recreation trips is important to public agencies' decisions about using recreation as a rural development tool. Minimizing the total cost of recreation trip production implies that households will spatially distribute their purchases of inputs to trip production, including both trip-specific inputs and durable recreation equipment. A recreation site contributes to a region's economic growth through household purchases of trip inputs. The site's cost effects, price information effects, and recreation and retail agglomeration effects cause changes in household recreation purchases and ultimately generate regional economic impacts.     

Long–Run Industry Equilibrium Under Demand Uncertainty: The Locational Effect of Business Taxes

This paper departs from previous work on the locational effects of business taxes under uncertainty by considering the attainment of long–run industry equilibrium. A general m input, planar–space production location model is adopted, and each individual firm is assumed to face random industry demand. I provide some interesting results which are contrary to those proposed by previous studies in the single–firm context and the relative impact of various business taxes.     

Perceptions of trekking tourism and social and environmental change in Nepal's Himalayas

The Himalayas are among the world's youngest mountain ranges. In addition to the geologic processes of mountain building and erosion, they are also highly vulnerable to human influenced change, occurring at local, national, regional, and international scales. A photo-elicitation methodology is employed to show how residents perceive those changes from historical perspectives, as well as their current conditions and impacts on their daily lives. Nepal's Khumbu region has undergone major social and environmental transformations since the 1960s when international trekking first began to influence the area's economy. The current perceptions of Khumbu residents of these changes are assessed through photo-elicitation interviews. Their responses are placed in the historical context of: (1) institutional and political changes, most of which have been driven by national government policies; (2) social and economic changes, for which the tourism economy has been central; and (3) environmental changes, reflecting the impacts of resource management and climate change. The mostly positive perceptions of Khumbu residents toward how their region has changed reflects general improvements in the physical and cultural landscapes of the Khumbu over time, as well as its continuing geographic isolation, which has helped to slow the rate of globalization, while also keeping the region a dynamic and popular tourist destination.     

Cluster analysis as a mode of inquiry: Its use in science and technology policymaking in North Carolina

We argue that cluster analysis is best viewed as a general mode of inquiry rather than a narrow technical methodology in regional economic analysis. The perspective emphasizes the value of cluster studies as starting points for open discussions among public officials, business leaders, and the lay public about their values and priorities for economic development. We illustrate our thesis with reference to two cluster studies that are influencing technology-focused regional development and education policy in the State of North Carolina.     

NEOCLASSICAL AND KEYNESIAN PERSPECTIVES ON THE REGIONAL MACRO-ECONOMY: A COMPUTABLE GENERAL EQUILIBRIUM APPROACH*

ABSTRACT Regional economic models typically either ignore prices altogether or simply treat them as exogenously determined. An unfortunate consequence of the neglect of prices is that model builders have been very much limited in the range of macroeconomic perspectives they have been able to bring to bear on regional economic issues. In this paper, we first explain how prices can be modeled endogenously at a regional level despite the paucity of data on regional prices. Using an illustrative interregional computable general equilibrium model for Malaysia, we then demonstrate how alternative macroeconomic visions of regional systems may be captured.     

How Does Economic Development in Eastern Europe Affect Austria's Regions? A Multiregional General Equilibrium Framework

The paper quantifies regional welfare effects arising from the increasing trade flows between Austria and its Eastern neighbors after the opening up of Eastern Europe. We calibrate a static multiregional Computable General Equilibrium (CGE) model with benchmark data from 1994 for Austria, subdivided into nine Federal Provinces. The regions are linked by trade flows with the four Eastern neighboring countries and with the rest of the world. We simulate the effects of the increase of trade interpenetration as observed between 1989 and 1999 in a comparative static analysis. Regional welfare effects under fixed and flexible wages are presented. We also compare national CGE results with estimates obtained in a simple partial equilibrium approach.