nep-cmp New Economics Papers
on Computational Economics
Issue of 2011‒12‒19
thirteen papers chosen by
Stan Miles
Thompson Rivers University

  1. Should Indonesia Suffer from More Reduction of the Subsidy to the Petroleum Sector? By Agus Budiyono; Ryuta Ray Kato
  2. A dynamic computable general equilibrium model with working capital for Honduras: By Morley, Samuel; Piñeiro, Valeria; Robinson, Sherman
  3. Optimal posting distance of limit orders: a stochastic algorithm approach By Sophie Laruelle; Charles-Albert Lehalle; Gilles Pag\`es
  4. Arbitrage-free Self-organizing Markets with GARCH Properties: Generating them in the Lab with a Lattice Model By B. Dupoyet; H. R. Fiebig; D. P. Musgrove
  5. Simulation of financial institutions activity in transitional economies By Rumyantsev, Mikhail I.
  6. External shocks and policy alternatives in small open economies: The case of El Salvador By Morley, Samuel; Piñeiro, Valeria; Robinson, Sherman
  7. The GTAP-W model: accounting for water use in agriculture By Alvaro Calzadilla, Katrin Rehdanz ,Richard S.J. Tol
  8. The strengths and failures of incentive mechanisms in notional defined contribution pension systems By A. Marano; C. Mazzaferro; M. Morciano
  9. FDI and growth: what cross-country industry data say By Maria Cipollina; Giorgia Giovannetti; Filomena Pietrovito; Alberto Franco Pozzolo
  10. How prudent are rural households in developing transition economies: By Jin, Ling; Chen, Kevin Z.; Yu, Bingxin; Huang, Zuhui
  11. Climate Change, Agricultural Production and Food Security: Evidence from Yemen By Clemens Breisinger, Olivier Ecker, Perrihan Al-Riffai, Richard Robertson, Rainer Thiele, Manfred Wiebelt
  12. Are oil, gold and the euro inter-related? time series and neural network analysis By Malliaris, A.G.; Malliaris, Mary
  13. Estimating financial risk using piecewise Gaussian processes By I. Garcia; J. Jimenez

  1. By: Agus Budiyono (Ministry of Internal Affairs of Indonesia); Ryuta Ray Kato (International University of Japan)
    Abstract: We numerically examine the impact of the actually implemented reduction policy of the subsidy to the petroleum sector by using a static CGE model with the latest input-output table of Indonesia of year 2008. Our simulation results indicate that the Indonesian economy suffered from the actually implemented policy with a welfare loss of 28,417.78 billion rupiah even with the conversion policy. Furthermore, the proposed future reduction policy by the Ministry of Finance would unavoidably result in a welfare loss even when the government continues the current conversion policy. However, our simulation results also suggest that a new future conversion policy with a slightly additional subsidy to the LPG sector would eventuate in completely offsetting the negative effect of the proposed plan on the future welfare with an expanding government expenditure.
    Keywords: Computable General Equilibrium (CGE) Model, Petroleum, Subsidy, Welfare, Simulation
    JEL: C68 D57 D58 D60 E17 H53
    Date: 2011–12
  2. By: Morley, Samuel; Piñeiro, Valeria; Robinson, Sherman
    Abstract: In this paper we develop a dynamic real-financial computable general equilibrium (CGE) model for Honduras that incorporates working capital. The model is designed to be useful as a development tool and to be used by policymakers who deal with short-run macro and trade issues. Our model extends previous modeling work on Honduras in several ways. First, it uses a new, updated social accounting matrix (SAM) for the country. Second, it is a recursive dynamic model that incorporates unemployment of labor in the short run. Most CGE models are not useful for short-run analysis because they are comparative static models that assume full employment. We specify a fixed minimum wage and an informal sector and use a recursive dynamic framework to solve for the short-run adjustment process that occurs as the economy responds to shocks. Finally, the model introduces working capital as an additional factor of production, complementary to physical capital, which allows us to examine the impact of monetary shocks that affect the supply of credit on the balance of payments, employment, and real income during periods of adjustment.
    Keywords: CGE models, economic growth, working capital, Computable general equilibrium (CGE) modeling,
    Date: 2011
  3. By: Sophie Laruelle (LPMA); Charles-Albert Lehalle (LPMA); Gilles Pag\`es (LPMA)
    Abstract: This paper presents a stochastic recursive procedure under constraints to find the optimal distance at which an agent must post his order to minimize his execution cost. We prove the $a.s.$ convergence of the algorithm under assumptions on the cost function and give some practical criteria on model parameters to ensure that the conditions to use the algorithm are fulfilled (using notably principle of opposite monotony). We illustrate our results with numerical experiments on simulated data but also by using a financial market dataset.
    Date: 2011–12
  4. By: B. Dupoyet; H. R. Fiebig; D. P. Musgrove
    Abstract: We extend our studies of a quantum field model defined on a lattice having the dilation group as a local gauge symmetry. The model is relevant in the cross-disciplinary area of econophysics. A corresponding proposal by Ilinski aimed at gauge modeling in non-equilibrium pricing is realized as a numerical simulation of the one-asset version. The gauge field background enforces minimal arbitrage, yet allows for statistical fluctuations. The new feature added to the model is an updating prescription for the simulation that drives the model market into a self-organized critical state. Taking advantage of some flexibility of the updating prescription, stylized features and dynamical behaviors of real-world markets are reproduced in some detail.
    Date: 2011–12
  5. By: Rumyantsev, Mikhail I.
    Abstract: The paper reviews the concepts of system dynamics and its applications to the simulation modeling of financial institutions daily activity. While widely applicable, the approach is of a particular interest in transitional and developing economies. The hybrid method of banking business processes re-engineering based on a combination of system dynamics, queuing theory and ordinary differential equations (Kolmogorov equations) is introduced. By the way of method illustration, we consider the promotion of a set of banking products among some categories of clients.
    Keywords: banking; simulation; system dynamics; Kolmogorov equations
    JEL: C51 C15 G21
    Date: 2011–11–12
  6. By: Morley, Samuel; Piñeiro, Valeria; Robinson, Sherman
    Abstract: In this paper we used a dynamic, regionalized computable general equilibrium (CGE) model to analyze the effect of various negative balance of payments shocks on output and employment and the effect of different alternative investment strategies on growth. The model shows clearly how sensitive El Salvador is to remittance or terms of trade shocks. Each 10 percent reduction in remittances lowers gross domestic product (GDP) by 0.2 percent and household consumption by 1.4 percent, with the cost rising as the shock intensifies. Any negative balance of payments shock forces a reduction in absorption, production, and employment and a real devaluation. Because El Salvador's economy is dollarized, that real devaluation can only come about through a fall in domestic prices brought about by recession. We show that the impact of the shock on output depends on how flexible wages are—the impact is smaller when real wages are flexible and greatest when they are fixed in dollars. We used the CGE model to analyze alternative investment strategies for increasing the growth rate. The investment share of GDP is low, and the model makes it clear that without some strategy for increasing investment, the economy's overall growth rate is likely to remain low. We hypothesized two alternative growth rates for investment, both associated with an increase in exogenous technical change. Both strategies require a marginal increase in the share of output devoted to investment. We also showed that if El Salvador can increase the investment share from 15.5 percent to just 16 percent over five years by producing a growth rate in investment of 8 percent per year, and if that increase produces a 1 percent increase in the rate of technical change in all sectors, then the growth rate of the economy will practically double, rising from 2.85 percent to 4.95 percent per year. There are equally favorable effects on employment for unskilled labor and on wages for skilled labor.
    Keywords: Development strategies, general equilibrium models, Regional development, Computable general equilibrium (CGE) modeling,
    Date: 2011
  7. By: Alvaro Calzadilla, Katrin Rehdanz ,Richard S.J. Tol
    Abstract: Water and agriculture are intrinsically linked. Water is essential for crop production and agriculture is the largest consumer of freshwater resources. However, this link is commonly ignored by economic models mainly because water use is not reported in the national economic accounts. Few regions have markets for water. This paper describes the new version of GTAP-W, a multi-region, multi-sector computable general equilibrium model of the world economy. The new version of GTAP-W distinguishes between rainfed and irrigated agriculture and introduces water as an explicit factor of production for irrigated agriculture. Moreover, the new production structure accounts for substitution possibilities between irrigation and other primary factors. The new model has been used to study a variety of topics including: irrigation efficiency, sustainable water use, climate change and trade liberalization. This paper is a technical description of the data and features added to the standard GTAP model
    Keywords: Computable General Equilibrium, Irrigation, Water Policy
    JEL: D58 Q17 Q25
    Date: 2011–11
  8. By: A. Marano; C. Mazzaferro; M. Morciano
    Abstract: Public pension systems based on the Notional Defined Contribution (NDC) principle were introduced during the ‘90s in Italy, Sweden and Poland, among other countries. They mimic private savings, in that individuals get back, as pensioners, what they contributed to social security during working life, plus returns. As such, NDC systems should realize actuarial equity and incentive neutrality. However, when one considers the presence of NDC pensions together with minimum and social assistance pensions, this is no longer true. Indeed, in all the three countries considered, the NDC system shows a regressive feature, which disincentivizes contributions, particularly from low earners, who would be better off entering, or staying in, the shadow economy. In order to reduce the extent of this phenomenon, we examine the effects of introducing, or increasing, the possibility of accumulation of social assistance and NDC pensions, which would also improve pension adequacy. A complete accumulation of the two would solve the incentive problem, but would be costly and would require a structural reform of the pension system financing mechanism, altering the current balance between social contributions and general fiscal revenues. We show the effects of a change in the cumulation rules for social assistance and NDC pensions in Italy using CAPP_DYN, a population-based dynamic microsimulation model, which allows assessment of the evolution of the pension system in the coming decades and the distributional implications of such reform.
    JEL: H55 J26 C51
    Date: 2011–11
  9. By: Maria Cipollina; Giorgia Giovannetti; Filomena Pietrovito; Alberto Franco Pozzolo
    Abstract: We simulate the macroeconomic and welfare implications of different fiscal consolidation scenarios in Italy using a medium scale two-areas dynamic general equilibrium currency-union model. Differently from similar models, ours is rich in the terms of fiscal features. We assume distortionary taxes (on labor income, capital income and consumption) and welfare-enhancing public expenditure. We distinguish between public spending on final goods and services, public employment and transfers to households. The scenarios that we consider envisage a decreases in the public debt to GDP ratio of 10 percentage points in 5 years. Based on our simulations we find that: first, fiscal distortions are quantitatively significant; second, a consolidation strategy that reduces expenditure and simultaneously lowers tax rates has a positive effect on long-run GDP of 5% to 7% and on welfare of 4% to 7% of the initial levels, depending on the composition of the adjustment; third, consumption and investment are stable or grow on impact and along the path to the new steady state; finally, spillovers to the rest of the euro area are expansionary and sizeable both in the long run and along the transition.
    Keywords: Foreign direct investment; Economic growth; Capital intensity; Technological progress; Patents; Labor productivity
    JEL: F23 F36 F43 O16
    Date: 2011–12
  10. By: Jin, Ling; Chen, Kevin Z.; Yu, Bingxin; Huang, Zuhui
    Abstract: Rural households in developing economies frequently use precautionary saving to cope with income risk. Such prudent behavior can be strengthened in transition economies where more risks are typically faced by households during and after reforms. This paper uses a rich panel of rural households in Zhejiang, China, to examine the correlation between income uncertainty and the target ratio of wealth to permanent income as suggested by the buffer-stock model. The empirical results suggest that Chinese rural households hold a significant level of wealth to mitigate the adverse impacts of income risk. Simulation results show that an increase in income risk leads to a sharp increase in household wealth and precautionary saving could drop substantially if income risk is eliminated. The high level of prudence of rural households under economic transition can help us better understand the developments in China, which will have policy implications for both developing and transition countries.
    Keywords: buffer-stock model, Income risk, precautionary saving,
    Date: 2011
  11. By: Clemens Breisinger, Olivier Ecker, Perrihan Al-Riffai, Richard Robertson, Rainer Thiele, Manfred Wiebelt
    Abstract: This paper provides a model-based assessment of local and global climate change impacts for the case of Yemen, focusing on agricultural production, household incomes and food security. Global climate change is mainly transmitted through rising world food prices. Our simulation results suggest that climate change induced price increases for food will raise agricultural GDP while decreasing real household incomes and food security. Rural nonfarm households are hit hardest as they tend to be net food consumers with high food budget shares, but farm households also experience real income losses given that many of them are net buyers of food. The impacts of local climate change are less clear given the ambiguous predictions of global climate models (GCMs) with respect to future rainfall patterns in Yemen. Local climate change impacts manifest itself in long term yield changes, which differ between two alternative climate scenarios considered, with implications for income and nutrition
    Keywords: Climate change, Food security, Hunger, Development, Growth, Yemen, Middle East and North Africa
    JEL: C63 C68 O13 O53 Q54
    Date: 2011–11
  12. By: Malliaris, A.G.; Malliaris, Mary
    Abstract: This paper investigates inter-relationships among the price behavior of oil, gold and the euro using time series and neural network methodologies. Traditionally gold is a leading indicator of future inflation. Both the demand and supply of oil as a key global commodity are impacted by inflationary expectations and such expectations determine current spot prices. Inflation influences both short and long-term interest rates that in turn influence the value of the dollar measured in terms of the euro. Certain hypotheses are formulated in this paper and time series and neural network methodologies are employed to test these hypotheses. We find that the markets for oil, gold and the euro are efficient but have limited inter-relationships among themselves.
    Keywords: Oil; Gold; the Euro; Relationships; Time-series Analysis; Neural Network Methodology
    JEL: G14 Q41 G15
    Date: 2011–11–28
  13. By: I. Garcia; J. Jimenez
    Abstract: We present a computational method for measuring financial risk by estimating the Value at Risk and Expected Shortfall from financial series. We have made two assumptions: First, that the predictive distributions of the values of an asset are conditioned by information on the way in which the variable evolves from similar conditions, and secondly, that the underlying random processes can be described using piecewise Gaussian processes. The performance of the method was evaluated by using it to estimate VaR and ES for a daily data series taken from the S&P500 index and applying a backtesting procedure recommended by the Basel Committee on Banking Supervision. The results indicated a satisfactory performance.
    Date: 2011–12

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