nep-cmp New Economics Papers
on Computational Economics
Issue of 2005‒05‒14
fifteen papers chosen by
Stan Miles
York University

  1. INFLATION TARGETING IN A SMALL OPEN ECONOMY: THE COLOMBIAN CASE By Franz Hamann; Juan Manuel Julio; Paulina Restrepo; Alvaro Jose Riascos Villegas
  2. The Free Trade Agreement between Colombia and USA: What can happen to Colombia? By Hernando Zuleta; Orlando Gracia
  5. Optimal Wage Taxation when the Choice to Work Depends on Accumulated Human Capital By Kreider, Brent
  6. The Impact of Tax and Transfer Systems on Children in the European Union By Miles Corak; Christine Lietz; Holly Sutherland
  7. Trade Liberalisation, Growth and Poverty in Senegal: a Dynamic Microsimulation CGE Model Analysis By Nabil Annabi; Fatou Cissé; John Cockburn; Bernard Decaluwé
  8. Trade Reform and Poverty in the Philippines: a Computable General Equilibrium Microsimulation Analysis By Caesar B. Cororaton; John Cockburn
  9. Testing for Neglected Nonlinearity in Long Memory Models By Richard T. Baillie; George Kapetanios
  10. Animal Spirits, Lumpy Investment, and Endogenous Business Cycles By Giovanni Dosi; Giorgio Fagiolo; Andrea Roventini
  11. Optimal Unemployment Insurance and Voting By Andreas Pollak
  12. Stock Options and Managerial Optimal Contracts By Manuel Santos; Jorge Aseff
  13. Convergence Properties of Policy Iteration By Manuel Santos; John Rust
  14. Existence and Uniqueness of Equilibrium in Nonoptimal Unbounded Infinite Horizon Economies with Capital By Kevin Reffett; Olivier Morand
  15. On a kinetic model for a simple market economy By Stéphane Cordier; Lorenzo Pareschi; Giuseppe Toscani

  1. By: Franz Hamann; Juan Manuel Julio; Paulina Restrepo; Alvaro Jose Riascos Villegas
    Abstract: This paper presents a dynamic stochastic general equilibrium model of inflation targeting in small open economy. We calibrate the model to the Colombian economy and present the response of some macroeconomic variables to different types of shocks that are relevant for emerging economies. We also analyze the sensitivity of those responses to some key parameters. Furthermore, using simulated data from the model we study the ability of the model to capture the spectra, the phase and the coherence of observed output and inflation. We follow a frequency domain comparison methodology proposed by Diebold, Ohanian and Berkowitz (1998,[19]). The Colombian data is characterized by: first, cyclical inflation and output gap (as measured by Hodrick – Prescott filter) are dominated by periodic movements between 2 and 25 quarters with a peak between 10 and 12 quarters. The cross spectrum and coherence show results in the the same direction. Second, the coherence does not show any significant dominance of frequencies for the cross movements but the correlation jumps to 0,6 for periodic movements around 5 quarters. These facts are compared to the data simulated from the model. We conclude that the simulated data spectra and cross spectra do not differ statistically from the respective population quantities for, at least, frequencies beyond 0,05 . Which correspond to periodic movements of up to at least 10 quarters. The model spectra presents more persistence than the observed data the population coherence is captured for most frequencies but the ones around the peack of the model's theoretical coherence and very long run periodic movements. Subsequent research will address these issues.
    Date: 2004–09–30
  2. By: Hernando Zuleta; Orlando Gracia
    Abstract: In order to assess the impact of a Free Trade Agreement (FTA) between Colombia and the United States of America, we describe the characteristics of the Colombian economy emphasizing its trade patterns and perspectives and identifying the sectors and regions that are likely to be the most sensitive to a FTA. We argue that the effects of a bilateral trade agreement between the USA and Colombia would be similar to those of past trade reforms. We first analyze the effect of past reforms over a diverse sample of countries such as Chile, Colombia and Mexico and then, using an applied general equilibrium model, simulate the effects over the Colombian economy of a bilateral agreement with USA. The simulations show that, although small, there is an increase in welfare and production of the Colombian consumers and firms.
    Date: 2004–12–31
    Abstract: Forecasting the demand for cash in Colombia has become a true challenge in the recent past. The last decade witnessed strong changes in the variables that determine the demand for money: Inflation and, hence, interest rates, fall substantially, technological progress was strong in the Colombian Payment System and distorting Tobin-like taxes to financial transactions were imposed. These changes are of special relevance when the demand for money is a non-linear function of its determinants. In this paper we exploit the flexibility of artificial neural networks (ANN) to explore the existence of nonlinearity in the demand for cash. The results show that the ANN models outperform those of linear nature in terms of forecast errors. Furthermore, significant evidence is found of non-linearity in the dynamics of the demand for cash.
    Keywords: DEMAND FOR MONEY,
    JEL: C45
    Date: 2004–12–31
    Abstract: Este artículo presenta un análisis empírico de la integración comercial de Colombia y Asia del Este utilizando un modelo de equilibrio general computable, en el cual se evalúan los efectos de varios escenarios de liberalización comercial sobre los flujos de comercio y el bienestar. Los resultados muestran que existe un potencial importante para el desarrollo de las exportaciones colombianas de productos químicos, confecciones, textiles y otras cosechas como flores, semillas de frutas, café, entre otros. Este resultado no se deriva de la firma de un tratado de libre comercio, sino de la eliminación unilateral de aranceles en ambas regiones
    JEL: C68
    Date: 2004–12–31
  5. By: Kreider, Brent
    Abstract: This paper studies how optimal wage tax conclusions from the classic life-cycle model of endogenous human capital accumulation are affected by relaxing a standard assumption that everyone works. In the standard model, the optimal wage tax is zero when wages are nonstochastic regardless of the impact of human capital on the future wage rate or the wage elasticity of labor hours. After allowing human capital accumulation to affect the extensive margin decision to work as well as the intensive number of labor hours to supply, distortionary wage taxation becomes desirable even with nonstochastic wages. In the absence of a corrective policy, young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers are not actuarially adjusted downward for human capital attainment. To restore proper price signals, wage taxes should be negatively correlated with age. Results from previous models hold when the decision to work is treated as exogenous or premiums for transfers are actuarially tailored to human capital choices. Calibrating the model using data from the 2000 Current Population Survey, numerical simulations suggest that even modest extensive margin employment elasticities can be sufficient to substantially impact the magnitudes -- and even change the signs -- of optimal wage tax rates on prime-age workers.
    JEL: H2 H3 J2
    Date: 2005–05–11
  6. By: Miles Corak (UNICEF Innocenti Research Centre and IZA Bonn); Christine Lietz (University of Cambridge); Holly Sutherland (ISER, University of Essex)
    Abstract: The objective of this paper is to analyze the impact of fiscal policy on the economic resources available to children, and on the child poverty rate. A static microsimulation model specifically designed for the purposes of comparative fiscal analysis in the European Union, EUROMOD, is used to study the age incidence of government taxes and transfers in 2001 in 15 EU countries. Three related questions are addressed. First, what priorities are currently embodied in government budgets across age groups, and in particular to what degree do cash transfer and tax systems benefit children relative to older groups? Second, what fractions of the needs of children are supported by elements of the tax and transfer systems directed explicitly to them? And third, what impact do measures of public resources for children have on child poverty rates?
    Keywords: poverty, children, social policy
    JEL: I30 I32 I38
    Date: 2005–05
  7. By: Nabil Annabi; Fatou Cissé; John Cockburn; Bernard Decaluwé
    Abstract: Much current debate focuses on the role of growth in alleviating poverty. However, the majority of computable general equilibrium (CGE) models used in poverty and inequality analysis are static in nature. The inability of this kind of model to account for growth (accumulation) effects makes them inadequate for long run analysis of the poverty and inequality impacts of economic policies. They exclude accumulation effects and do not allow the study of the transition path of the economy where short run policy impacts are likely to be different from those of the long run. To overcome this limitation we use a sequential dynamic CGE microsimulation model that takes into account accumulation effects and makes it possible to study poverty and inequality through time. Changes in poverty are then decomposed into growth and distribution components in order to examine whether de-protection and factor accumulation are pro-poor or not. The model is applied to Senegalese data using a 1996 social accounting matrix and a 1995 survey of 3278 households. The main findings of this study are that trade liberalisation induces small increases in poverty and inequality in the short run as well as contractions in the initially protected agriculture and industrial sectors. In the long run, it enhances capital accumulation, particularly in the service and industrial sectors, and brings substantial decreases in poverty. However, a decomposition of poverty changes shows that income distribution worsens, with greater gains among urban dwellers and the non-poor.
    Keywords: Dynamic CGE model, trade liberalisation, poverty, inequality, Senegal
    JEL: D33 D58 E27 F17 I32 O15 O55
    Date: 2005
  8. By: Caesar B. Cororaton; John Cockburn
    Abstract: The paper employs an integrated CGE-microsimulation approach to analyze the poverty effects of tariff reduction. The results indicate that the tariff cuts implemented between 1994 and 2000 were generally poverty-reducing, primarily through the substantial reduction in consumer prices they engendered. However, the reduction is much greater in the National Capital Region (NCR), where poverty incidence is already lowest, than in other areas, especially rural, where poverty incidence is highest. Tariff cuts lower the cost of local production and bring about real exchange rate depreciation. Since the non-food manufacturing sector dominates exports in terms of export share and export intensity, the general equilibrium effects of tariff reduction is an expansion of this sector and a contraction in the agricultural sector. This, in turn, leads to an increase in the relative returns to factors, such as capital, used intensively in the non-food manufacturing sector and a fall in returns to unskilled labor. As rural households depend more on unskilled labor income, income inequality worsens as a result.
    Keywords: Dynamic CGE model, trade liberalisation, poverty, inequality, Senegal
    JEL: D33 D58 E27 F13 F14 I32 O15 O53
    Date: 2005
  9. By: Richard T. Baillie (Queen Mary, University of London); George Kapetanios (Queen Mary, University of London)
    Abstract: This paper constructs tests for the presence of nonlinearity of unknown form in addition to a fractionally integrated, long memory component in a time series process. The tests are based on artificial neural network structures and do not restrict the parametric form of the nonlinearity. The tests only require a consistent estimate of the long memory parameter. Some theoretical results for the new tests are obtained and detailed simulation evidence is also presented on the power of the tests. The new methodology is then applied to a wide variety of economic and financial time series.
    Keywords: Long memory, Non-linearity, Artificial neural networks, Realized volatility, Absolute returns, Real exchange rates, Unemployment.
    JEL: C22 C12 F31
    Date: 2005–04
  10. By: Giovanni Dosi; Giorgio Fagiolo; Andrea Roventini
    Abstract: In this paper, we present an evolutionary model of industry dynamics yielding en- dogenous business cycles with 'Keynesian' features. The model describes an economy composed of firms and consumers/workers. Firms belong to two industries. The first one performs R&D and produces heterogeneous machine tools. Firms in the second industry invest in new machines and produce a homogenous consumption good. Consumers sell their labor and fully consume their income. In line with the empirical literature on investment patterns, we assume that the investment decisions by firms are lumpy and constrained by their financial structures. Moreover, drawing from behavioral theories of the firm, we assume boundedly rational expectation formation. Simulation results show that the model is able to deliver self-sustaining patterns of growth characterized by the presence of endogenous business cycles. The model can also replicate the most important stylized facts concerning micro- and macro-economic dynamics. Indeed, we find that investment is more volatile than GDP; consumption is less volatile than GDP; investment, consumption and change in stocks are procyclical and coincident variables; employment is procyclical; unemployment rate is countercyclical; firm size distributions are skewed but depart from log-normality; firm growth distributions are tent-shaped.
    Keywords: Evolutionary Dynamics, Agent-Based Computational Economics, Animal Spirits, Lumpy Investment, Output Fluctuations, Endogenous Business Cycles.
  11. By: Andreas Pollak (University of Freiburg)
    Abstract: The framework of a general equilibrium heterogeneous agent model is used to study the optimal design of an unemployment insurance (UI) scheme and the voting behaviour on unemployment policy reforms. In a first step, the optimal defined benefit and defined replacement ratio UI systems are obtained in simulations. Then, the question whether switching to such an optimal system from the status quo would be approved by a majority of the voters is explored. Finally, the transitional dynamics following a policy change are analysed. Accounting for this transition has an important influence on the voting outcome.
    Keywords: insurance, heterogeneous agents, job search, voting, human capital
    JEL: C61 D58 D78 E24 E61 J64 J65
    Date: 2005–05–12
  12. By: Manuel Santos (W. P. Carey School of Business Department of Economics); Jorge Aseff (No affiliation)
    Abstract: In this paper we are concerned with the performance of stock option contracts in the provision of managerial incentives. In our simple framework, we restrict the space of contracts available to the principal to those conformed by a fixed payment and a package of call options on the firm's stock. We then offer a characterization of optimal stock option compensation schemes. As compared to the fixed payment and the option grant, we find that the strike price plays an intermediate role in the provision of insurance and incentives. We also develop some efficient algorithms for the computation of optimal contracts in which the observable outcome is drawn from a continuous distribution. These algorithms are useful to address some important issues such as the calibration of a principal-agent model, the degree of risk aversion compatible with current compensation schemes, and the performance of stock option contracts.
  13. By: Manuel Santos (W. P. Carey School of Business Department of Economics); John Rust (University of Maryland)
    Abstract: This paper analyzes the asymptotic convergence properties of policy iteration in a class of stationary, infinite-horizon Markovian decision problems that arise in optimal growth theory. These problems have continuous state and control variables, and must therefore be discretized in order to compute an approximate solution. The discretization converts a potentially infinite dimensional fixed-point problem to a finite dimensional problem defined on a finite grid of points in the state space, and it may thus render inapplicable known convergence results for policy iteration such as those of Puterman and Brumelle (1979). Under certain regularity conditions, we prove that for piecewise linear interpolation, policy iteration converges quadratically, i.e. the sequence of errors en = |Vn - V*| (where Vn is an approximate value function produced from the nth policy iteration step) satisfies en+1 = Le2n for all n. We show how the constant L depends on the grid size of the discretization. Also, under more general conditions we establish that convergence is superlinear. We illustrate the theoretical results with numerical experiments that compare the performance of policy iteration and the method of successive approximations. The quantitative results are consistent with theoretical predictions.
  14. By: Kevin Reffett (W. P. Carey School of Business Department of Economics); Olivier Morand (University of Connecticut)
    Abstract: In applied work in macroeconomics and finance, nonoptimal infinite horizon economies are often studied in which the state space is unbounded. Important examples of such economies are single sector growth models with production externalities, valued fiat money, monopolistic competition, and/or distortionary government taxation. Although sufficient conditions for existence and uniqueness of Markovian equilibrium are well known for the compact state space case, no similar sufficient conditions exist for unbounded growth. This paper provides such a set of sufficient conditions, and also presents a computational algorithm that will prove asymptotically consistent when computing Markovian equilibrium.
  15. By: Stéphane Cordier (MAPMO - Laboratoire de Mathématiques et Applications Physique Mathématique - - CNRS : UMR6628 - Université d'Orléans); Lorenzo Pareschi (Center for Modelling Computing and Statistics, c/o Department of Economy, Institutions and Territory - Università degli studi di Ferrara); Giuseppe Toscani (Department of Mathematics of Pavia - Università degli studi di Pavia)
    Abstract: In this paper, we consider a simple kinetic model of economy involving both exchanges between agents and speculative trading. We show that the kinetic model admits non trivial quasi-stationary states with power law tails of Pareto type. In order to do this we consider a suitable asymptotic limit of the model yielding a Fokker-Planck equation for the distribution of wealth among individuals. For this equation the stationary state can be easily derived and shows a Pareto power law tail. Numerical results confirm the previous analysis.
    Keywords: Econophysics;Boltzmann equation;wealth and income distributions;Fokker Planck model; Monte Carlo simulations; Pareto distribution
    Date: 2004–12–21

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