A STATIC-DYNAMIC CGE MODEL FOR VENEZUELA

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:
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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:


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







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.
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A STATIC-DYNAMIC CGE MODEL FOR
VENEZUELA
Topics for today’s presentation:
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









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.
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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
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:
10
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.
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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
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 .
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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.
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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.
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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
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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
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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.
37
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.
38
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.
40
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
41
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.
42
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
44
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
45
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
46
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
48
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:
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



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




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