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MODELS The GEM-E3 Model and its extensions. Prof. P. Capros ICCS/NTUA.

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Presentation on theme: "MODELS The GEM-E3 Model and its extensions. Prof. P. Capros ICCS/NTUA."— Presentation transcript:

1 MODELS The GEM-E3 Model and its extensions. Prof. P. Capros ICCS/NTUA

2 March Objectives To install operational versions of GEM-E3 on the computer system of the European Commission for in house use. To support a series of policy applications with GEM- E3 on issues related to the Lisbon agenda and the assessment of impacts from regulation and legislative initiatives of the Commission. To improve the GEM-E3 computable general equilibrium model.

3 March The GEM-E3 model. GEM-E3 is a multi-region Computable General Equilibrium model built to evaluate the economic impacts of structural policies. GEM-E3 provides the user with many modelling options: a European model, a World model, and a series of different model closures. GEM-E3 is developed using GAMS and uses MS- Excel for the data and the results. A non-developer user may run GEM-E3 after a short training, example IPTS of EC/JRC.

4 March Model Extensions Internal Market under imperfect competition and economies of scale. Bottom up energy sub-model and depletable energy resources mechanism. Endogenous technical progress. Imperfect markets for labour and capital.

5 March Model versions delivered to Commission

6 March “Internal market, competition and trade” (GEME3 v. ICT). This version will serve as the basis for all model developments. Standard version featuring: - Market integration and trade with imperfect competition and economies of scale - Energy and environmental module - Option for unemployment (wage curve introduction).

7 March “Endogenous Growth, Internal Market, Competition and Trade” (GEME3 – v. EGICT). Model with endogenous technical change. Combines the advanced trade model version with endogenous growth driven by technology progress and innovation. The EGICT version will be used to study: -the knowledge society, -the internal market, -the business climate and the environmental sustainability aspects of the Lisbon strategy

8 March “Social structures, Internal market, Competition and Trade” ” (GEME3 – v. SICT). SICT version features: - disaggregated and improved labour, capital, skills and households - improved representation of the services sector and the trade for services in the Internal Market. SICT model version enables to study: - Distributional and social impacts on employment. - Advanced analysis on double dividend issues (employment and environment).

9 March Links between model versions and Lisbon policy agenda. Policy Agenda The model extensions 1.The Knowledge Society 2.The Internal Market 3.The Business Climate 4.The Labour Market 5.Environmental Sustainability 1.Endogenous Technical Progress 2.Market Integration under imperfect competition and product varieties 3.Capital market and investment flows 4.Labour market under imperfect competition 5.Energy-Environment sustainability driving innovation, demand for equipment goods and exports

10 March Schedule Phase A The GEM-E3 team will: Perform the necessary updates, Check the operation of the model, Improve the user interface Provide the user manual and Install the ICT GEM-E3 version at the Commission. Phase B Install EGCT and SICT versions at the Commission Finalisation of user interface User manual provision Provide support in designing and implementing the policy scenarios Timeline Month 5 : Installation of improved model version (ICT) to the Commission. Month 17: Policy applications as per Phase A. Month 19: Installation of final model versions to the Commission. Month 35: End of policy applications as per Phase B.

11 GEM-E3 Regional and sectoral coverage (current and proposed)

12 March GEM-E3 Data Bases The European version of GEM-E3 is entirely based on Eurostat statistics. The World version of GEM-E3 is based on the GTAP-6 database which covers the whole world aggregated in 87 regions and 57 sectors (base year 2001).

13 March GEM-E3 Regional aggregation. Current: 1.Oceania 2.Japan 3.East Asia 4.China 5.India 6.Rest of Asia 7.U.S.A. 8.Canada 9.Mexico & Venezuela 10.Latin America 11.E.U Other Europe 13.C.I.S. 14.Middle East 15.Mediterranean 16.South Africa 17.Rest of Africa Proposed: E.U. 27 (separately) Rest of Europe North America Latin America and Mexico Rest of OECD C.I.S. Rest of Asia Africa Sub Sahara Middle East and N. Africa

14 March GEM-E3 Sectoral aggregation Current 1.AGRICULTURE 2.COAL 3.OIL 4.GAS 5.ELECTRICITY 6.NON FERROUS METALS 7.FERROUS METALS 8.CHEMICAL PRODUCTS 9.OTHER ENERGY INTENSIVE 10.ELECTRONIC EQUIPMENT 11.TRANSPORT EQUIPMENT 12.OTHER EQUIPMENT GOODS 13.OTHER MANUFACTURING PRODUCTS 14.CONSTRUCTION 15.FOOD INDUSTRY 16.TRADE AND TRANSPORT 17.TEXTILE INDUSTRY 18.OTHER MARKET SERVICES 19.NON MARKET SERVICES Proposed 1.AGRICULTURE 2.COAL 3.OIL 4.GAS 5.ELECTRICITY 6.NON FERROUS METALS 7.FERROUS METALS 8.CHEMICAL PRODUCTS 9.OTHER ENERGY INTENSIVE 10.ELECTRONIC EQUIPMENT 11.TRANSPORT EQUIPMENT 12.OTHER EQUIPMENT GOODS 13.OTHER MANUFACTURING PRODUCTS 14.CONSTRUCTION 15.FOOD INDUSTRY 16.TRADE AND TRANSPORT 17.TEXTILE INDUSTRY 18.COMMUNICATIONS 19.FINANCIAL SERVICES 20.INSURANCE 21.BUSINESS SERVICES NEC 22.RECREATIONAL AND OTHER SERVICES 23.PUBLIC ADMINISTRATION, DEFENSE, EDUCATION, HEALTH

15 WP 2.1: Internal Market and world trade under imperfect competition and economies of scale Extension of GEM-E3

16 March Basic modelling idea Goods are differentiated by origin (Armington assumption) Differentiation by consumers is reflected through the form of the demand nesting hierarchy. The selling price of a good is a function of an endogenous mark-up and the eventual barriers to trade. when enlarging the market The mark-ups reduce when enlarging the market, as a result of more intensive competition.

17 March Supply Technologies Calibration Minimum Efficient Scale Cost Gradient (engineering studies) Number of equivalent equal size firms from Herfindahl index Calibration of mark-up Entry/exit of firms Symmetric firms Number of firms endogenous To ensure zero profits or non-zero profits (optional) Endogenous mark-ups Depending on concentration Depending on average cost

18 March Demand nesting hierarchy Structural changes such as the EU Internal Market

19 March The love of variety effect Hypothesis about horizontal product differentiation between firms within the same sector and country When varieties increase, the consumer obtains the same aggregate quantity more efficiently (i.e. with lower quantities hence lower cost) This relaxes short-term supply constraints, leading to lower market prices and magnifies the effect of market enlargement The number of varieties increase with more intensive competition as the effect from the market enlargement dominates over the effect from market concentration.

20 March Imperfect competition Various modelling options (Cournot, monopolistic competition, Ramsey-Boiteux pricing, etc.) In any case the market price depends on costs and an endogenous mark-up: Under free entry/exit of firms, the number of firms adjusts in a sector, depending also on the efficient size of company as related to the market size. Enlargement leads to increase of number of firms hence varieties and a reduction of the mark-ups

21 WP 2.2: Engineering economic model integration for the energy and environment systems Extensions of GEM-E3: - Engineering oriented energy sub-model - Depletable energy resources - Endogenous energy efficiency and savings - Environmental impact sub-model - Sub-model for cost-benefit environmental assessment - Double dividend analysis: environment and employment

22 March Basic modelling idea The core GEM-E3 already covers energy issues and the interactions with the environment Linkage to a detailed environmental sub-model Calibration to energy projections by PRIMES and POLES. However, the core model lacks Discrete representation of power producing technologies. Non-linear (decreasing return to scale) mechanism for the supply of energy resources, such as the depletable fossil fuels.

23 March Bottom-up for power generation Explicitly represents a variety of old and new technologies of power generation. Endogenous investment into new power generation plants. Energy investment is linked to the demand for equipment goods. Technology progress incorporated through the capital vintages. Emissions from power generation linked to the environmental sub-model and policy instruments influence power sector decisions.

24 March Bottom-up for power generation Dispatching under capacity constraints Investment in new power plants Price of electricity – options Mark-up (under IC) Ramsey-Boiteux to recover fixed costs Influenced by Fuel and technology costs Environmental policies

25 March Depletable energy resources The price of energy resources become a function of The rate of extraction from proven reserves and the rate of discovery of new reserves. The accumulated use of the resources The reserves are introduced as a separate production factor. In the presence of climate change policies, abatement costs increase as a result of lower fossil fuel prices related to lower demand; opposite effects in case of dash for gas.

26 March Endogenous energy savings Endogenous decision to invest in energy saving equipment. Production and consumption functions are extended with the energy saving considered as an additional factor Energy saving draws from a limited potential for savings per sector, hence follows decreasing return to scale Investment in energy saving induces expenses taken into account in the least cost decision of the agent. The purchase of goods to implement energy saving influences total demand for goods and services

27 WP 2.3: Endogenous Growth through technology and innovation Extension of GEM-E3

28 March Basic modelling idea Combination of two production functions: Knowledge production function Knowledge production function: generation of new innovation Output production function Output production function: standard KLEM function extended to account for the impact of endogenous technology innovation

29 March Endogenous innovation: supply Main modelling hypothesis: R&D investment of firms show decreasing return to scale with accumulated knowledge Spillovers represented as positive externality leading to higher productivity of R&D expenditure The combination determines the supply function of innovations (price and quantity locus) Public R&D subsidies support innovation but are subject to the effects from GE budget constraint

30 March Endogenous Innovation: demand Decision of a firm to purchase innovation: Endogenous, positively affects productivity of factors but induces expenditure Applies to the new capital vintage Simultaneously with the demand for all production factors (L,E,M) and productive investment, so as to maximise expected net present value of the firm In the model dynamics depends on firm sales expectations and the unit costs of factors

31 Sub Package 2.4: Model improvement of labour market, households sector and capital market Extensions of GEM-E3 : - Improvement of the formulation of labour markets. - Inclusion of multiple household classes. - Improvement of capital market and capital mobility.

32 March Capital and labour formulation of standard GEM-E3 Labour supply is derived from consumption-leisure-savings choice, labour demand depends on the KLEM optimisation Capital demand is derived from investment function, capital supply depends on general equilibrium closure (Walras law) Current modelling options for labour market: Wages determined from equilibrium of supply-demand Current modelling options for capital market: Rate of return on capital derived from national budget equilibrium, a reduced form reflecting differentiated interest rates and risk premia Rate of return on capital derived from multinational income-savings closure

33 March Labour market extension Categories of households are introduced with different patterns about consumption and savings Skills of labour are introduced. Skills are linked with household categories and the mechanism of income distribution Each market is imperfect, reflecting negotiation power of unions and the influence of unemployment Labour is imperfectly mobile across countries.

34 March Capital market extension Capital flows financing investment are differentiated per origin and destination in the presence of differentiated rates of return and risk premia Capital is imperfectly mobile across regions and market clearing is imperfectly coordinated This extension allows to understand the adjustments to the global economy when structural policies, such trade liberalization, environmental sustainability etc. are undertaken.


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