nep-cmp New Economics Papers
on Computational Economics
Issue of 2011‒11‒21
twelve papers chosen by
Stan Miles
Thompson Rivers University

  1. Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment By Sandra Gomes; Pascal Jacquinot; Matthias Mohr; Massimiliano Pisani
  2. Impact Analysis of Changes in The Price of Water Resources in China and Beijing By Masaru Ichihashi; Shinji Kaneko
  3. Two practical algorithms for solving rational expectations models By Flint Brayton
  4. A Continuous Labour Supply Model in Microsimulation: A Life-Cycle Modelling Approach with Heterogeneity and Uncertainty Extension By Li, Jinjing; Sologon, Denisa Maria
  5. THE REFORM OF THE PUBLIC HEALTH INSURANCE AND ECONOMIC GROWTH OF JAPAN By Toshihiro Ihori, Ryuta Ray Kato, Masumi Kawade, Shun-ichiro Bessho
  6. Computing Tournament Solutions using Relation Algebra and REL VIEW By Rudolf Berghammer; Agnieszka Rusinowska; Harrie De Swart
  7. Computation of LQ Approximations to Optimal Policy Problems in Different Information Settings under Zero Lower Bound Constraints By Levine, Paul; Pearlman, Joseph
  8. Fast Heuristics for Delay Management with Passenger Rerouting By Dollevoet, T.; Huisman, D.
  9. Motivating Organizational Search By Oliver Baumann; Nils Stieglitz
  10. Designing large value payment systems: An agent-based approach By Sheri Markose; Amadeo Alentorn; Stephen Millard; Jing Yang
  11. Numerical Solutions of Optimal Risk Control and Dividend Optimization Policies under A Generalized Singular Control Formulation By Zhuo Jin; George Yin; Chao Zhu
  12. Tracing the temporal evolution of clusters in a financial stock market By Argimiro Arratia; Alejandra Caba\~na

  1. By: Sandra Gomes (Bank of Portugal); Pascal Jacquinot (European Central Bank); Matthias Mohr (European Central Bank); Massimiliano Pisani (Bank of Italy)
    Abstract: We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, a unilateral markup reduction by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. Second, cross-country coordination of reforms would add extra benefits to each region, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. In the long run German (Portuguese) output would increase by 9.2 (8.6) percent. Third, cross-country coordination would make the macroeconomic performance of the different regions more homogeneous, in terms of price competitiveness and real activity. Overall, our results suggest that while reforms implemented individually by each country in the euro area will produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects.
    Keywords: economic policy, structural reforms, dynamic general equilibrium modeling, competition, markups.
    JEL: C53 E52 F47
    Date: 2011–10
  2. By: Masaru Ichihashi; Shinji Kaneko (Graduate School for International Development and Cooperation, Hiroshima University)
    Abstract: This paper aims to analyze the impact of changes in resource prices on intra-region goods supply and on extra-region changes in prices, as well as possible impacts on the demand side, using China and Beijing as examples for analysis. Results of the analysis with Input-Output model and CGE model demonstrate that changes in the price of water supply do not have as significant an impact as is the case with energy goods such as electrical power or oil and mining. Also, another result with International IO model shows that an increase in the price of water resources in China would first induce changes in the prices of some domestic goods (education and research, chemical fertilizers, etc.); the effect on other countries would be relatively large in countries including Malaysia, Thailand, Singapore, and South Korea, and in the industries of flour milling, heavy electrical equipment, knitting, non-ferrous metals, and apparel. However, all of these impacts would be minimal.
    Keywords: water resources; energy price rising effect; International Input-Output; CGE model.
    JEL: F18 O13 Q56
    Date: 2011–11
  3. By: Flint Brayton
    Abstract: This paper describes the E-Newton and E-QNewton algorithms for solving rational expectations (RE) models. Both algorithms treat a model's RE terms as exogenous variables whose values are iteratively updated until they (hopefully) satisfy the RE requirement. In E-Newton, the updates are based on Newton's method; E-QNewton uses an efficient form of Broyden's quasi-Newton method. The paper shows that the algorithms are reliable, fast enough for practical use on a mid-range PC, and simple enough that their implementation does not require highly specialized software. The evaluation of the algorithms is based on experiments with three well-known macro models--the Smets-Wouters (SW) model, EDO, and FRB/US--using code written in EViews, a general-purpose, easy-to-use software package. The models are either linear (SW and EDO) or mildly nonlinear (FRB/US). A test of the robustness of the algorithms in the presence of substantial nonlinearity is based on modified versions of each model that include a smoothed form of the constraint that the short-term rate of interest cannot fall below zero. In two single-simulation experiments with the standard and modified versions of the models, E-QNewton is found to be faster than E-Newton, except for solutions of small-to-medium sized linear models. In a multi-simulation experiment using the standard versions of the models, E-Newton dominates E-QNewton.
    Date: 2011
  4. By: Li, Jinjing (Maastricht University); Sologon, Denisa Maria (CEPS/INSTEAD)
    Abstract: This paper advances a structural inter-temporal model of labour supply that is able to simulate the dynamics of labour supply in a continuous setting and to circumvent two main drawbacks of most of the existing models. The first limitation is the inability to incorporate individual heterogeneity as every agent is sharing the same parameters of the utility function. The second one is the strong assumption that individuals make decisions in a world of perfect certainty. Essentially, this paper offers an extension of marginal-utility-of-wealth-constant labour supply functions known as "Frisch functions" under certainty and uncertainty with homogenous and heterogeneous preferences. Two alternative models are proposed for capturing individual heterogeneity. First, a "fixed effect vector decomposition" model, which allows the individual specific effects to be correlated with the explanatory variables included in the labour supply model, and second, a mixed fixed and random coefficient model, which incorporates a higher degree of individual heterogeneity by specifying individual coefficients. Uncertainty is controlled for by introducing an expectation correction into the model. The validation of each simulation model is realized in comparison with the standard Heckman model. The lifetime models based on the fixed effect vector decomposition yield the most stable and unbiased simulation results, both under certainty and uncertainty. Due to its improved accuracy and stability, this lifetime labour supply model is particularly suitable for enhancing the performance of the pension models, thus providing a better reference for policymaking.
    Keywords: lifetime labour supply, dynamic microsimulation
    JEL: C20 D90 J22
    Date: 2011–10
  5. By: Toshihiro Ihori, Ryuta Ray Kato, Masumi Kawade, Shun-ichiro Bessho
    Abstract: This paper evaluates one of the most drastic reforms of the Japanese public health insurance started in year 2006, by numerically examining the reform in an aging Japan in a dynamic context with overlapping generations within a computable general equilibrium framework. Our simulation results are as follows. First of all, an increase in the co-payment rate, which is one of the most prominent changes in the reform, would result in higher economic growth as well as higher welfare since it stimulates private savings. Secondly, the ex-post moral hazard behavior reduces economic growth. Thirdly, an increasing trend of the future public health insurance benefits can mainly be explained by an aging population, and an increase in the co-payment rate has little effect to reduce the public health insurance benefits in the future. Fourthly, the effect of a decrease in the medical cost, which could possibly be achieved by the improvement in efficiency in the public health insurance, the provision of more preventative medical services, or technological progress in the medical field, on the future burdens is very small. Finally, if the government implements a policy to keep the ratio of the public health insurance benefits to GDP constant, then the government has to keep reducing the public health insurance benefits over time, and the reduction rate should be 45 percent in year 2050. Such a policy also eventuates in lower economic growth until around year 2035. Our simulation results thus indicate that the reform is not so effective to reduce the future public health insurance benefits, but it can achieve higher economic growth and enhance welfare by stimulating private savings.
    JEL: C68 D58 E17 E62 H51 H55 H62 I18 O40
    Date: 2011
  6. By: Rudolf Berghammer (Institut für Informatik - Universitat Kiel); Agnieszka Rusinowska (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Harrie De Swart (Department of Philosophy - Erasmus University Rotterdam)
    Abstract: We describe a simple computing technique for the tournament choice problem. It rests upon a relational modeling and uses the BDD-based computer system RelView for the evaluation of the relation-algebraic expressions that specify the solutions and for the visualization of the computed results. The Copeland set can immediately be identified using RelView's labeling feature. Relation-algebraic specifications of the Condorcet non-losers, the Schwartz set, the top cycle, the uncovered set, the minimal covering set, the Banks set, and the tournament equilibrium set are delivered. We present an example of a tournament on a small set of alternatives, for which the above choice sets are computed and visualized via RelView. The technique described in this paper is very flexible and especially appropriate for prototyping and experimentation, and as such very instructive for educational purposes. It can easily be applied to other problems of social choice and game theory.
    Keywords: Tournament, relational algebra, RelView, Copeland set, Condorcet non-losers, Schwartz set, top cycle, uncovered set, minimal covering set, Banks set, tournament equilibrium set.
    Date: 2011–10
  7. By: Levine, Paul; Pearlman, Joseph
    Abstract: This paper describes a series of algorithms that are used to compute optimal policy under full and imperfect information. Firstly we describe how to obtain linear quadratic (LQ) approximations to a nonlinear optimal policy problem. We develop novel algorithms that are required as a result of having agents with forward-looking expectations, that go beyond the scope of those that are used when all equations are backward-looking; these are utilised to generate impulse response functions and second moments for the case of imperfect information. We describe algorithms for reducing a system to minimal form that are based on conventional approaches, and that are necessary to ensure that a solution for fully optimal policy can be computed. Finally we outline a computational algorithm that is used to generate solutions when there is a zero lower bound constraint for the nominal interest rate.
    Date: 2011–11
  8. By: Dollevoet, T.; Huisman, D.
    Abstract: Delay management models determine which connections should be maintained in case of a delayed feeder train. Recently, delay management models are developed that take into account that passengers will adjust their routes when they miss a connection. However, for large-scale real-world instances, these extended models become too large to be solved with standard integer programming techniques. We therefore develop several heuristics to tackle these larger instances. The dispatching rules that are used in practice are our first heuristic. Our second heuristic applies the classical delay management model without passenger rerouting. Finally, the third heuristic updates the parameters of the classical model iteratively. We compare the quality of these heuristic solution methods on real-life instances from Netherlands Railways. In this experimental study, we show that our iterative heuristic can solve large real-world instances within a short computation time. Furthermore, the solutions obtained by this iterative heuristic are of good quality.
    Keywords: public transportation;daily management;passenger rerouting;railway operations
    Date: 2011–10–01
  9. By: Oliver Baumann; Nils Stieglitz
    Abstract: This paper investigates the value of high-powered incentives for motivating search for novelty in business organizations. While organizational search critically depends on the individual efforts of employees, motivating search effort is challenged by problems of unobservable behavior and the misalignment of individual and organizational interests. Prior work on organizational design thus suggests that stronger incentives can overcome these problems and make organizations more innovative. To address this conjecture, we develop a computational model of organizational search that rests on two opposing effects of high-powered incentives: On the one hand, they promote higher effort by increasing the potential rewards from search; on the other hand, they increase the competition among ideas, as the ability of an organization to implement and remunerate good ideas is limited by its resource base. Our results indicate that low-powered incentives are effective in generating a sufficient stream of incremental innovations, but that they also result in a shortage of more radical innovations. Stronger incentives, in contrast, do not systematically foster radical innovations either, but instead create a costly oversupply of good ideas. Nonetheless, higher-powered incentives can still be effective in small firms and if strong persistence is required to develop a new idea. Based on the analysis of our model, we develop a set of propositions that appear to be consistent with extant evidence and point to new avenues for empirical research.
    Keywords: Organizational search, incentives, innovation, agent-based simulation
    Date: 2011
  10. By: Sheri Markose; Amadeo Alentorn; Stephen Millard; Jing Yang
    Abstract: The purpose of this paper is to show how agent-based simulations of payment systems can be used to aid central bankers and payment system operators in thinking about the appropriate design of payment settlement systems to minimise risk and increase their efficiency. Banks, which we model as the ‘agents’, are capable of a degree of autonomy with which to respond to payment system rules and adopt a strategy that determines how much collateral to post with the central bank at the start of the day (equivalently how much liquidity to borrow intraday from the central bank) and when to send payment orders to the central processor. An interbank payment system with costly liquidity requires banks to solve an intraday cash management problem, minimising their liquidity and delay costs subject to their beliefs about what the other banks are doing. Some preliminary results are given on how banks learn to endogenously determine how much liquidity to post in the interbank liquidity management game.
    Date: 2011–11–11
  11. By: Zhuo Jin; George Yin; Chao Zhu
    Abstract: This paper develops numerical methods for finding optimal dividend pay-out and reinsurance policies. A generalized singular control formulation of surplus and discounted payoff function are introduced, where the surplus is modeled by a regime-switching process subject to both regular and singular controls. To approximate the value function and optimal controls, Markov chain approximation techniques are used to construct a discrete-time controlled Markov chain with two components. The proofs of the convergence of the approximation sequence to the surplus process and the value function are given. Examples of proportional and excess-of-loss reinsurance are presented to illustrate the applicability of the numerical methods.
    Date: 2011–11
  12. By: Argimiro Arratia; Alejandra Caba\~na
    Abstract: We propose a methodology for clustering financial time series of stocks' returns, and a graphical set-up to quantify and visualise the evolution of these clusters through time. The proposed graphical representation allows for the application of well known algorithms for solving classical combinatorial graph problems, which can be interpreted as problems relevant to portfolio design and investment strategies. We illustrate this graph representation of the evolution of clusters in time and its use on real data from the Madrid Stock Exchange market.
    Date: 2011–11

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