New Economics Papers
on Computational Economics
Issue of 2010‒07‒03
ten papers chosen by

  1. WIATEC: A World Integrated Assessment Model of Global Trade Environment and Climate Change By Truong P. Truong; Claudia Kemfert
  2. Interest-Rate Modeling with Multiple Yield Curves By Andrea Pallavicini; Marco Tarenghi
  3. Economic Reform in North Korea: A Dynamic General Equilibrium Model By Bradford, Scott C.; Kim, Dong-jin; Phillips, Kerk L.
  4. Methods for Ex Ante Economic Evaluation of Free Trade Agreements By Cheong, David
  5. Distributional Implications of Alternative U.S. Greenhouse Gas Control Measures By Sebastian Rausch; Gilbert E. Metcalf; John M. Reilly; Sergey Paltsev
  6. The Double Divident Hypothesis in a CGE Model:Specific Factors and Variable Labour Supply* By Iain Fraser; Robert Waschik
  7. Computation of vector sublattices and minimal lattice-subspaces of R^k. Applications in finance By V. N. Katsikis; I. A. Polyrakis
  8. What is the growth potential of green innovation? An assessment of EU climate policy options By Andrea Conte; Ariane Labat; Janos Varga; Žiga Žarnić
  9. A Dynamic Model of Specialization and Market Development as Engines of Economic Growth By Phillips, Kerk L.
  10. A systematic approach to multi-period stress testing of portfolio credit risk By Thomas Breuer; Martin Jandačka; Javier Mencía; Martin Summer

  1. By: Truong P. Truong; Claudia Kemfert
    Abstract: This paper describes the structure of the World Integrated Assessment model of global Trade, Environmental, and Climate change (WIATEC).The model consists of a multi-regional multi-sectoral core CGE model linked to a climate model. The core CGE is based on an existing global trade and environment model called GTAP-E (Truong, 1999; Burniaux and Truong, 2002). A suite of different and interchangeable 'modules' are then built around this 'core' to enable the model to be able to handle a range of different policy issues such as CO2 emissions, abatement, trading, non-CO2 (CH4 and N2O) emissions, land use land use change and forestry (LULUCF) activities, and changing technologies in the electricity generation sector. The approach which uses a core model structure with different additional modules built around this core structure allows the overall model to be flexible and can be adapted to a range of different policy issues. We illustrate the usefulness of this approach in a policy experiment which looks at the interaction between emissions trading scheme and the promotion of renewable energy targets in the European Union climate policy.
    Keywords: Integrated Assessment Model, Technological Change, Climate Policy
    JEL: Q O38 C68
    Date: 2010
  2. By: Andrea Pallavicini; Marco Tarenghi
    Abstract: The crisis that affected financial markets in the last years leaded market practitioners to revise well known basic concepts like the ones of discount factors and forward rates. A single yield curve is not sufficient any longer to describe the market of interest rate products. On the other hand, using different yield curves at the same time requires a reformulation of most of the basic assumptions made in interest rate models. In this paper we discuss market evidences that led to the introduction of a series of different yield curves. We then define a HJM framework based on a multi-curve approach, presenting also a bootstrapping algorithm used to fit these different yield curves to market prices of plain-vanilla contracts such as basic Interest Rate Swaps (IRS) and Forward Rate Agreements (FRA). We then show how our approach can be used in practice when pricing other interest rate products, such as forward starting IRS, plain-vanilla European Swaptions, Constant Maturity Swaps (CMS) and CMS spread options, with the final goal to investigate whether the market is actually using a multi-curve approach or not. We finally present some numerical examples for a simple formulation of the framework which embeds by construction the multi-curve structure; once the model is calibrated to market prices of plain-vanilla options, it can be used via a Monte Carlo simulation to price more complicated exotic options.
    Date: 2010–06
  3. By: Bradford, Scott C.; Kim, Dong-jin; Phillips, Kerk L.
    Abstract: This paper examines the impact of hypothetical market reforms in North. We build a dynamic general equilibrium model and simulate multiple reform scenarios. We first construct a baseline model which mimicks the current command economy. In this scenario the government allocates output in an inefficient way and simulated economic growth is negative. We next model a semi-market transition that allows producers choices regarding the distribution of available capital. However, total capital is still chosen by the government. Lastly, we consider two scenarios with full market reform allowing for the usual market mechanisms derived from consumer utility maximization, firm profit maximization, and market clearing prices. In one scenario we keep government investment in public infrastructure unchanged at the low baseline level. In the other we drastically increase the rate of infrastructure investment so that it matches that of South Korea. In all we maintain a closed economy assumption and a constant size for the military. Our simulations show little hope for the North Korean economy without a significant increase in infrastructure. Although all of the reforms raise the level of output and consumption per capita, only with significant increases in infrastructure investment does output growth change from negative to positive.
    Keywords: factor mobility; dynamic general equilibrium; specific-factors; Korea
    JEL: F22 F15 F42
    Date: 2010–01
  4. By: Cheong, David (World Trade Institute)
    Abstract: This paper provides practical techniques to policymakers for evaluating the potential economic effects of a Free Trade Agreement (FTA). To this end, the paper discusses how to apply three methods: (i) trade indicators, (ii) SMART (Software for Market Analysis and Restrictions on Trade) in WITS (World Integrated Trade Solutions), and (iii) the GTAP (Global Trade Analysis Project) model. The paper identifies the different aspects of an FTA that each method can evaluate, describes data sources and software requirements, specifies how to interpret the output from each method, and discusses the strengths and limitations of each method. To illustrate each method, there are examples applied to countries in the Association of Southeast Asian Nations (ASEAN), particularly Cambodia, Lao People‘s Democratic Republic, and Vietnam.
    Keywords: regionalization; evaluation methods; trade indicators; SMART model; CGE analysis; preferential trade agreements; Asia
    JEL: F13 F15
    Date: 2010–06–01
  5. By: Sebastian Rausch; Gilbert E. Metcalf; John M. Reilly; Sergey Paltsev
    Abstract: We analyze the distributional and efficiency impacts of different allowance allocation schemes for a national cap and trade system using the USREP model, a new recursive dynamic computable general equilibrium model of the U.S. economy. The USREP model tracks nine different income groups and twelve different geographic regions with the United States. Recently proposed legislation include the Waxman-Markey House bill, the similar Kerry-Boxer bill in the Senate that has been replaced by a Kerry-Lieberman draft bill, and the Cantwell-Collins Senate bill that takes a different approach to revenue allocation. We consider allocation schemes motivated by the recent proposals applied to a comprehensive national cap and trade system that limits cumulative greenhouse gas emissions over the control period to 203 billion metric tons. The policy target approximates national goals identified in pending legislation. We find that the allocation schemes in all proposals are progressive over the lower half of the income distribution and proportional in the upper half of the income distribution. Scenarios based on the Cantwell-Collins allocation proposal are less progressive in early years and have lower welfare costs due to smaller redistribution to low income households and consequently lower income-induced increases in energy demand and less savings and investment. Scenarios based on the other three allocation schemes tend to overcompensate some adversely affected income groups and regions in early years but this dissipates over time as the allowance allocation effect becomes weaker. Finally we find that carbon pricing by itself (ignoring the return of carbon revenues through allowance allocations) is proportional to modestly progressive. This striking result follows from the dominance of the sources over uses side impacts of the policy and stands in sharp contrast to previous work that has focused only on the uses side. The main reason is that lower is that lower income households derive a large fraction of income from government transfers and, reflecting the reality that these are generally indexed to inflation, we hold the transfers constant in real terms. As a result this source of income is unaffected by carbon pricing, while wage and capital income is affected.
    Date: 2010
  6. By: Iain Fraser (University of Kent); Robert Waschik (Department of Finance, La Trobe University)
    Abstract: In this paper we use a Computable General Equilibrium (CGE) model to exam- ine the Double Dividend (DD) hypothesis. Using the general equilibrium GTAP model data for Australia and the UK, we incorporate endogenous production taxes to achieve targeted abatement policies in the production of energy goods (coal, oil, gas, petroleum, electricity). Following Bento and Jacobsen (2007), we examine the role played specific factors in the production of energy goods. In particular, we employ a novel approach to model the impact of specific factors on the existence and magnitude of the DD. We also incorporate endogenous labour supply, which allows us to illustrate the size of the labour market effect of targeted abatement policies. Our results indicate that with abatement tax revenue offset by reductions in other government distortions, we can identify which specific forms of revenue recycling yield a DD. For Australia we find that the magnitude of the DD is signif- icantly larger when we employ the specific factor characterisation of an economy and we recycle the revenue through reductions in consumption taxes. However, we find no evidence of a DD for Australia when we employ income tax as the recycling instrument. Finally, we find virtually no evidence of a DD for the UK for either recycling instrument regardless of the specific factors characterisation we employ.
    Keywords: environmental taxes, double dividend, specific factors
    JEL: Q52 Q48 C68
    Date: 2010–02
  7. By: V. N. Katsikis; I. A. Polyrakis
    Abstract: In this article we perform a computational study of Polyrakis algorithms presented in [12,13]. These algorithms are used for the determination of the vector sublattice and the minimal lattice-subspace generated by a finite set of positive vectors of R^k. The study demonstrates that our findings can be very useful in the field of Economics, especially in completion by options of security markets and portfolio insurance.
    Date: 2010–06
  8. By: Andrea Conte; Ariane Labat; Janos Varga; Žiga Žarnić
    Abstract: The aim of this paper is to analyse options for reforming the fragmented Chinese pension system that covers only 55 % of urban employees and a very small part of the rural population. After a brief history of pensions in China we present recent reform proposals and then discuss principles of pension reforms, with particular attention to reducing the pension contribution rates so that compliance could improve and coverage increase. As the Chinese population is ageing fast, we are presenting transition to a notional defined contribution (NDC) system as a model for adjusting the pension rules for increasing longevity. Transforming the accrued pension rights into NDC accounts and starting to apply the new NDC-inspired rules on indexation is not necessarily a jump into the unknown for the Chinese pensions system. Rather, it could be a useful and long-awaited clarification to the rules and a way to move towards a more uniform system nationwide. With the help of a simulation model based on Chinese data we produce scenarios for a range of pension reforms and assess their properties.
    Keywords: Oksanen,China, population ageing, pension reforms, notional defined contribution scheme,NDC
    JEL: H11 H55
    Date: 2010–06
  9. By: Phillips, Kerk L.
    Abstract: This paper constructs a model of growth based on Adam Smith's notions of specialization and extent of the market. We seek to explain the following stylized facts. 1) The share of household production in total output has fallen over time as the economy has grown. 2) Services as a percent of GDP have risen at the same time. In this paper growth depends on specialization of labor according to comparative advantage in production and learning-by-doing in transactions services. It is a model of sustained, but not infinite, growth. Indeed, the main point of the paper is that it is possible to build growth models that match the historic experience without relying in unbounded growth. The model can replicate the above stylized facts for reasonable annual GDP growth rates. Simulations show that inequality over the growth episode is characterized by an inverted U-shaped curve.
    Keywords: growth; extent of the market; market development; specvialization
    JEL: D13 O47 O40
    Date: 2010–03
  10. By: Thomas Breuer (Research Centre PPE); Martin Jandačka (Research Centre PPE); Javier Mencía (Banco de España); Martin Summer (Oesterreichische Nationalbank)
    Abstract: We propose a new method for analysing multiperiod stress scenarios for portfolio credit risk more systematically than in the current practice of macro stress testing. Our method quantifies the plausibility of scenarios by considering the distance of the stress scenario from an average scenario. For a given level of plausibility our method searches systematically for the most adverse scenario for the given portfolio. This method therefore gives a formal criterion for judging the plausibility of scenarios and it makes sure that no plausible scenario will be missed. We show how this method can be applied to a range of models already in use among stress testing practitioners. While worst case search requires numerical optimisation we show that for practically relevant cases we can work with reasonably good linear approximations to the portfolio loss function that make the method computationally very efficient and easy to implement. Applying our approach to data from the Spanish loan register and using a portfolio credit risk model we show that, compared to standard stress test procedures, our method identifies more harmful scenarios that are equally plausible.
    Keywords: Stress Testing, Credit Risk, Worst Case Search, Maximum Loss
    JEL: G28 G32 G20 C15
    Date: 2010–06

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