New Economics Papers
on Computational Economics
Issue of 2012‒10‒13
eighteen papers chosen by

  1. A New Trinomial Recombination Tree Algorithm and Its Applications By Peter C. L. Lin
  2. Modelling Social Learning in an Agent-Based New Keynesian Macroeconomic Model By Isabelle SALLE (GREThA, CNRS, UMR 5113); Martin ZUMPE (GREThA, CNRS, UMR 5113); Murat YILDIZOGLU (GREThA, CNRS, UMR 5113); Marc-Alexandre SENEGAS (GREThA, CNRS, UMR 5113)
  3. Strong Convergence for Euler-Maruyama and Milstein Schemes with Asymptotic Method By Hideyuki Tanaka; Toshihiro Yamada
  4. Incentive Design and Manager Performances: an ABM Approach By Concetta Sorropago
  6. Implications of an increase in domestic prices of gas in Russia, an application of the regional economic model SUSTRUS By Christophe Heyndrickx; Victoria Alexeeva - Talebi; Natalia Tourdyeva
  7. The General Equilibrium Model of Illegal Settlements in Palangkaraya City, Indonesia:-A Numerical Simulation- By Yuzuru Miyata; Indrawan Permana
  8. Forecasting and simulation of the impact of public policies on industrial districts using an agent-based model By Federico Pablo-Marti; Juan Luis Santos; Antonio Gacía-Tabuenca; María Teresa Gallo; Tomás Mancha
  9. Spatial Perspectives of Improving Competition in Lebanon By Eduardo Haddad
  10. Fiscal Reforms during Fiscal Consolidation: The Case of Italy By Giampaolo Arachi; Valeria Bucci; Ernesto Longobardi; Paolo Panteghini; Maria Laura Parisi; Simone Pellegrino; Alberto Zanardi
  11. Modelling commuter patterns: a spatial microsimulation approach for combining regional and micro level data By Robin Lovelace; Dimitris Ballas
  12. The estimation of LES demand elasticities for CGE models By Jouko Kinnunen; Saara Tamminen; Mira Jussila
  13. Forecasting with Unobserved Heterogeneity By Matteo G. Richiardi
  14. Decarbonizing Europe’s power sector by 2050 - Analyzing the implications of alternative decarbonization pathways By Jägemann, Cosima
  15. Trading Volume in General Equilibrium with Complete Markets By Eric Aldrich
  16. Application of a new spatial computable general equilibrium model for assessing strategic transport and land use development options in London and surrounding regions By Jie Zhu; Ying Jin; Marcial Echenique
  17. Assessing the economic costs of an outbreak of Foot and Mouth Disease on Brittany: A dynamic computable general equilibrium By Gohin, Alexandre; Rault, Arnaud
  18. Innovation Process in Japan in the Early 2000s as Seen from Inventors: Agenda for strengthening innovative capability (Japanese) By ISOGAWA Daiya; OHASHI Hiroshi

  1. By: Peter C. L. Lin
    Abstract: A New Trinomial Recombination Tree Algorithm and Its Applications
    Date: 2012–10
  2. By: Isabelle SALLE (GREThA, CNRS, UMR 5113); Martin ZUMPE (GREThA, CNRS, UMR 5113); Murat YILDIZOGLU (GREThA, CNRS, UMR 5113); Marc-Alexandre SENEGAS (GREThA, CNRS, UMR 5113)
    Abstract: We propose an agent-based macroeconomic model (ABM) inspired by the New Keynesian general equilibrium model (NKM, Woodford 2003). We analyse the aggregate economic dynamics resulting from social learning of agents (households and firms). Households’ labour supply and consumption demand, as well as firms\' labour demand and wage offers evolve through imitation and random experimenting by the agents. We study, in this setting, the aggregate properties of the economy and the ability of those learning agents to coordinate on the intra-temporal equilibrium of the original model. Our approach is quite different from the existing learning literature in the NKM (à la Evans & Honkapohja, that mainly focuses on learning for testing local stability of equilibria), since learning is directly embedded in the behaviour of the individual agents. This original approach opens new perspectives about the NKM, and allows us to ask new questions about the coordination problems that can result from social learning. First, our computational analysis (Monte Carlo simulations) shows that social learning does not allow the agents to correctly learn about the interdependence between markets, because of the emergence of coordination problems that result in insufficient labour supply and depressive dynamics. Second, we shed light on the general properties of social learning that are behind these results in a general (dis)equilibrium setting, and prove that their neutralisation, at least on the one side of the markets, can significantly improve the performance of the economy. Our results point to the importance of carefully modelling learning mechanisms within macroeconomic ABMs.
    Keywords: Computational Economics, Agent-Based Modelling, Social Learning, New Keynesian Model, General Equilibrium, Coordination Problems
    JEL: C63 D11 D21 D51 D83 E21 E32
    Date: 2012
  3. By: Hideyuki Tanaka; Toshihiro Yamada
    Abstract: Motivated by weak convergence results in [Takahashi, A. and Yoshida, N., Monte Carlo simulation with asymptotic method, J. Japan Statist. Soc., Vol. 35 No. 2, 171-203, 2005.], we show strong convergence for an accelerated Euler-Maruyama scheme applied to perturbed stochastic differential equations. The Milstein scheme with the same acceleration is also discussed as an extended result. The theoretical results can be applied to analyzing the multi-level Monte Carlo method originally developed by M.B. Giles. Several numerical experiments for the SABR stochastic volatility model are presented in order to confirm the efficiency of the schemes.
    Date: 2012–10
  4. By: Concetta Sorropago (University of Roma "Tor vergata", Italy)
    Abstract: We present a simplified model to provide a virtual laboratory to test the effects of the use of different performance evaluation measures to design manager’s incentives in a project-based professional service organization. Our company’s owner has to cope with the scheduling of multiple resource constraint projects in real time (RCMPSP), and with the design of the production manager incentive, whose variable wage is tied to some measures of the performance, which are proxies of the original owner’s goal. We propose an agent based model approach where the agents’ intelligence lies in the choice of the scheduling sequences. A discrete event simulator (DES) executes the projects, allocating in real time, the limited resources available. A Genetic Algorithm, evolving the sequence, randomly generated, uses the DES to simulate the effect and ranks the solutions. In this way, we investigate the incentive alignment problem as a resource allocation problem, comparing the results deriving from their respective "good solutions".
    Keywords: Complex System Dynamics, Resource constrained multi project scheduling, Incentive Design, Performance Evaluation Measures, Genetic Algorithm
    JEL: C63 D23 L2 M12
    Date: 2012–05
  5. By: Luckmann, Jonas; Siddig, Khalid H.A.; Flaig, Dorothee; Grethe, Harald
    Abstract: Water is a scarce resource in Israel. With fluctuating supplies and an increasing demand, the need for using alternative water sources such as reclaimed wastewater, brackish groundwater and desalinated seawater increases. This paper investigates the economy-wide effects of a de-clining supply of natural fresh water (ground and surface water) and the increasing utilization of alternative water sources (recycled wastewater, brackish water, desalinated seawater). To ac-count for different production structures and usage options, a single country Computable Gen-eral Equilibrium (CGE) model is used, in which several water activities produce differentiated water commodities. These water commodities are used as intermediate inputs in other produc-tion activities or are consumed by households. Results suggest that especially the agricultural sector would be affected by a reduction of natu-ral fresh water availability, as it is the largest water user. However, the effect can be mitigated if substitution possibilities with alternative water sources are increased, especially the desalination of seawater can contribute to this. The rest of the economy is affected to a lesser extent, as water is only a minor input in other sectors and the water sector itself is small compared to the whole Israeli economy.
    Keywords: CGE, water, wastewater reclamation, desalination, CES nesting structure, Israel, Wasser, Abwasseraufbereitung, Abwasserrückgewinnung, Entsalzung, CES, Israel, Agricultural and Food Policy, Resource /Energy Economics and Policy,
    Date: 2012
  6. By: Christophe Heyndrickx; Victoria Alexeeva - Talebi; Natalia Tourdyeva
    Abstract: The present paper studies the effect of an upward correction of the natural gas price on the Russian domestic market. Russia has the largest gas reserves in the world and currently produces around 550 billion cubic meters of gas each year. Sixty percent of the production is sold domestically at prices below long term marginal cost, for households and for industrial producers. The pricing of natural gas is currently a hot topic in Russia, as the Russian government proposes to liberalize the regulated domestic market price and decrease subsidies for natural gas products. This is claimed to fit in a policy promoting energy efficiency, increasing investments in natural gas production and bringing the natural gas price on the domestic market closer to long term cost recovery. We will approach the issue of gas pricing through taxation of intermediate and final use of natural gas for domestic industries and consumers. Considerable attention is given to economic impacts, environmental issues and social effects of gas pricing. We compare several scenarios of differential gas pricing, simulating increases in price for industrial and private consumers at different annual growth rates, with a time horizon from 2012 until 2020. Our results are based on an application of the SUSTRUS model, a novel computable general equilibrium model, which was developed in the same-named EU funded project. The SUSTRUS model belongs to the group of regional CGE models, applied to analyze policies with a strong social, economic and environmental dimension. The model is constructed as a regional model on federal level, where regions are linked by interregional trade flows, a federal government level and migration. The main data sources for the model are the public databases of Rosstat and the micro-level household data from the Russia Longitudinal Monitoring Survey (RLMS). Calibration of the model database was performed by a flexible cross-entropy minimization sub module and standard applied general equilibrium techniques. We find that deregulating natural gas pricing can lead to a significant improvement in energy efficiency, if prices are gradually increased for both consumers and industries alike. Differences in regional energy efficiency decrease, but are still significant. We show that increasing the consumer price of gas is indeed a regressive policy, but can be compensated for by the government. Keywords: Regional general equilibrium modeling, sustainability, energy, natural gas, pricing, policy JEL codes: R13,Q01,Q41,Q48,Q56
    Date: 2012–10
  7. By: Yuzuru Miyata; Indrawan Permana
    Abstract: Since decade 80`s, colonies of illegal settlements began rapidly increasing in many urban areas of cities in Indonesia. During the decade, urban population living in slum areas was recorded about 54% of total urban population particularly in mega cities of Indonesia. Nonetheless, that percentage was increasing to be 69.12% in decade of 90Âfs. In line with that, in term of size, illegal settlement also increased to be 46.13% and 52.32% in decade 80`s and 90`s respectively (NUSSP, 2007). This urban phenomenon has been identified not only taking place in big cities but also taking place in small-medium cities with less than a million of population (Soegijoko et al ed, 2005). Aimed at to better understand the manner in which the illegal settlements come into being in Palangkaraya city, Indonesia, previously Permana and Miyata (2009) have developed a general equilibrium model of Palangkaraya city, Indonesia. Differing from Fujita`s model (Fujita, 1989), the model took into account land heterogeneity in a city thus rendering a typical land type of most cities in river basin areas. The model incorporated the expected flood damage rate (EFDR) on household assets. The EFDR itself is employed to predict the damage by the river flood since flood occurrences are stochastic and such appropriate flood data is not recorded well. Applying the general equilibrium modeling approach, one can derive the conclusion that the bid rents by low income households get higher than those by high income households in flood prone areas. This is the contrary conclusion being highlighted as compared with that in the traditional urban economics. This paper aims to show and discuss results of the numerical simulation of the model thus analyzing configuration of residential land use pattern in Palangkaraya city, Indonesia. The paper is organized as follows: Section 1 is for introduction. Section 2 is the general equilibrium model. Section 3 is the numerical simulation. And finally section 4 is aimed for conclusion.
    Date: 2012–10
  8. By: Federico Pablo-Marti; Juan Luis Santos; Antonio Gacía-Tabuenca; María Teresa Gallo; Tomás Mancha
    Abstract: The research in the topic of industrial districts has been focused on the identification of which industries are forming industrial districts and on the causes behind the development of the clusters. As well as there are historical and efficiency reasons that are behind the current configuration of the industrial districts, up to now it seemed not crucial to clarify how different public policies affect the structure and relationships between the enterprises that are included in the clusters. With the use of an agent-based model we can analyze and forecast how each enterprise will change in stochastic terms. Moreover, it make feasible to predict changes in the size and structure of clusters and possible spillovers. ABMs are based on the assumption in which the economy fluctuates according to the behaviour of agents, which react in a proactive way. This difference makes ABMs an accurate tool for forecasting during crisis taking into account both changes in expectations and in policy instruments. In conventional models interactions are indirect, but agent-based modeling (ABM) allow simulating a plenty of shifts in agents’ behaviour through imitation or in their strategies according to the behaviour of the majority. These capabilities applied to firms permit to modify many not explicit assumptions incorporated into the majority of conventional models with the objective of predicting changes in the size and structure of industrial districts. Moreover, ABM allow making simulations changing parameters included in one or several public policies and obtaining the effects of these policies on clusters, accordingly to their own characteristics. The starting point is the building, trough statistical matching techniques making use of microdata sources, of a general database that replicates the attributes and location of all individuals and companies located in a specific spatial context. Then, behaviours are established for both companies and individuals who are interacting according to their preferences and endowments. In addition to these agents we include a raster of locations, built through downscaling techniques and display the current situation of different policies, in order to measure properly the changes introduced for making simulations. Finally, it would be possible to identify with high accuracy each cluster and its different characteristics. This permits to forecast and simulate the impact of changes in public policies on clusters structure and performance in stochastic terms thus enabling a better assessment of policy outcomes taking into account the robustness of the effect, related to the stochastic nature of the aggregated results. That is, ABM will allow us a better assessment of both policy outcomes and the certainty about the results. JEL: L52, R12, R58 Key words: Agent-based model, policy evaluation, industrial districts
    Date: 2012–10
  9. By: Eduardo Haddad
    Abstract: This paper introduces the ARZ model – a fully operational spatial computable general equilibrium model for Lebanon – and its use for the analysis of place-based policies in Lebanon, in an attempt to bring additional insights to some of the proposals presented in the National Physical Master Plan of the Lebanese Territory. The ARZ model uses a similar approach to Haddad and Hewings (2005) to incorporate recent theoretical developments in the new economic geography. We apply the model to look at the ex ante potential spatial implications of an increase in domestic and international integration of Lebanese regions through reductions in trade costs.
    Date: 2012–10
  10. By: Giampaolo Arachi (Deparment of Economics and Mathematical Statistics, University of Salento); Valeria Bucci (Deparment of Economics and Mathematical Statistics, University of Salento); Ernesto Longobardi (Department of Economics and Quantitative Methods, University of Bari); Paolo Panteghini (Department of Economics, University of Brescia); Maria Laura Parisi (Department of Economics, University of Brescia); Simone Pellegrino (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Alberto Zanardi (Department of Economics, University of Bologna)
    Abstract: In this paper we aim to discuss the strengths and weaknesses of the fiscal consolidation package adopted recently by the Italian Government in order to achieve a balanced budget by 2013. Revenues are forecasted to increase by more than 3.3 GDP percentage points; these stem mostly from indirect and property taxation. The analysis of the Italian case is interesting since it seems to be consistent with a recent strand of the literature which, in order to foster both short and long-term economic growth, advocated a shift of the tax burden from capital and labour income to consumption and property. Through a set of micro simulation models, this paper evaluates the effects of the Italian fiscal package on households and firms. We show that, in respect of households’ income, indirect and property tax reforms are highly regressive, whilst the reform makes limited resources available for growth enhancing policies (reduction in the effective corporate tax burden). Then, we propose an alternative fiscal package. We show that a less regressive reform on households can be obtained by shifting taxation from personal and corporate income tax to indirect taxation. Our proposal allows the tax burden on firms to be reduced substantially and, in the meantime, offers lower personal income tax rates on households in the lowest deciles of income distribution since they are penalized most by the increase in indirect taxation.
    Keywords: Tax reforms, Fiscal consolidation, Micro simulation models, Italy
    JEL: H2 D22 D31
    Date: 2012–02
  11. By: Robin Lovelace; Dimitris Ballas
    Abstract: Transport to work is a universal phenomenon, but is uneven over space. The distribution of mode and distance statistics vary depending on a range of factors. The scale of analysis (from individual to local and regional levels), the location of the study area (e.g. urban or rural settlements), and the socio-economic characteristics of the target population all influence commuter patterns. This heterogeneity is problematic for decision makers tasked with encouraging more sustainable and less costly commuter patterns based on transport to work statistics. Existing studies on commuting fail to consider the multiple levels at which transport systems operate, and leave important questions unanswered. For example, should policies target individuals, local areas, or regions, and at what level should they operate for maximum benefit? This paper outlines this research problem, and then describes an approach for tackling it based on a case study of Yorkshire and the Humber, an economically peripheral region of the UK. Our spatial microsimulation model uses iterative proportional fitting (IPF) to simulate the characteristics of individual commuters, in terms of socio-economic class, age, sex, and income, while geographically aggregated commuter statistics are constrained by Census data. This represents a novel application of spatial microsimulation, to model commuter behaviour. The approach has the potential to allow 'what if' scenarios to be undertaken, and opens up the possibility of dynamic microsimulation to policy makers. This latter possibility is attractive because it allows scenario-based projections of the future for the evaluation of policy assumptions. The results of the static model illustrate the importance of accounting for variability at the individual level when devising transport policies. The method is discussed with respect to long term transport policy objectives at the EU level. In conclusion, our approach could provide valuable information for policy evaluation at individual, local and regional levels. Keywords: spatial microsimulation, commuting, transport policy JEL Code: R49
    Date: 2012–10
  12. By: Jouko Kinnunen; Saara Tamminen; Mira Jussila
    Abstract: Computable general equilibrium (CGE) models require external parameters for proper estimations and can be relatively sensitive to the elasticity estimates used in them. We estimate LES demand elasticities and Frisch parameters for all Finnish household income deciles. These estimates will be used also inVATTAGE CGE model. We use three different methodologies for the estimation of demand elasticities: price index based approach, pseudo-panel dataset based regressions with exogenous Frisch parameters, and finally cross-section data based estimations with the Frisch parameters. Only the last methodology provides adequate results despite the use of detailed and extensive data. We conclude that the estimation of LES demand elasticities for narrow commodity groups is cumbersome with standard household consumption survey data. Typically these surveys account consumption only from a time period of a few weeks. The chance of consuming various durable consumption items during such a short time period is low. Use of longer survey periods could decrease the share of zero consumption observations and help on the identification of elasticities.
    Keywords: demand elasticity, linear expenditure function, household consumption data, computable general equilibrium
    JEL: D12 C68
    Date: 2012–09–20
  13. By: Matteo G. Richiardi
    Abstract: Forecasting based on random intercepts models requires imputation of the individual permanent effects to the simulated individuals. When these individuals enter the simulation with a history of past outcomes this involves sampling from conditional distributions, which might be unfeasible. I present a method for drawing individual permanent effects from a conditional distribution which only requires to invert the corresponding estimated unconditional distribution. While the algorithms currently available in the literature require polynomial time, the proposed method only requires matching two ranks and works therefore in N lnN time.
    Keywords: forecasting, microsimulation, random intercept models, unobserved heterogeneity
    JEL: C15 C53 C63
    Date: 2012
  14. By: Jägemann, Cosima (Energiewirtschaftliches Institut an der Universitaet zu Koeln)
    Abstract: In this paper, the implications of alternative decarbonization pathways for Europe's power sector up until the year 2050 are analyzed. In speci fic, an electricity system optimization model is used to investigate the minimal costs of decarbonization under a stand-alone CO2 reduction target and to quantify the excess costs associated with renewable energy targets and politically implemented restrictions on alternative lowcarbon technologies, such as nuclear power. Our numerical simulations con firm the theoretical argumentation concerning counterproductive overlapping regulation. The decarbonization of Europe's power sector is found to be achieved at minimal costs under a stand-alone CO2 reduction target (171 bn €2010). Additionally implemented RES-E targets lead to signi cant excess costs of at least 237 bn €2010. Excess costs of a complete nuclear phase-out in Europe by 2050 are of the same order of magnitude (274 bn €2010).
    Keywords: Electricity; CO2 target; renewable target; excess costs; optimization model
    JEL: C61 Q40 Q50
    Date: 2012–09–26
  15. By: Eric Aldrich (Federal Reserve Bank of Atlanta)
    Abstract: This paper investigates asset trade in a general-equilibrium complete-markets endowment economy with heterogeneous agents. It shows that standard no-trade results cease to hold when agents have heterogeneous beliefs and that substantial trade volume is generated, even in the presence of a spanning set of assets. Further, trade volume and price movements have a positive relationship in the model, as is well documented in the empirical literature. This paper also develops a computational algorithm for solving finite-period heterogeneous-beliefs economies and demonstrates how the problem is well suited for large-scale parallel computing methods, such as GPU computing.
    Date: 2012
  16. By: Jie Zhu; Ying Jin; Marcial Echenique
    Abstract: Application of a new spatial computable general equilibrium model for assessing strategic transport and land use development options in London and surrounding regions By Jie Zhu, Ying Jin and Marcial Echenique The Martin Centre, University of Cambridge, UK JEL Classification: C68, F12, F16, F17,O18, R13, R42 Key words: Computable general equilibrium; spatial modelling; increasing returns to scale; integrated land use and transport modelling This paper reports the application of our new spatial computable general equilibrium (SCGE) model for analyzing the wider effects of strategic transport and land use development options. We examine the insights afforded by a SCGE model relative to those provided by existing land use and transport models into the effectiveness of transport and land use strategies. We start from a static imperfect competition computable general equilibrium model for an open economy, and extend it to incorporate (1) Hicks-neutral agglomeration effects that arise from external increasing returns to scale induced from urbanization and transport improvements, (2) land as an explicit factor input to production, and (3) commuting and migration of labour in a dynamic labour market. These extensions are built on models of constant elasticity of substitution specified for production technology and utility functions, interregional trade pooling, concave-shaped iceberg transport costs, the Armington specification regarding product varieties, the Dixit and Stiglitz type of monopolistic competition among producers, and the concept of the spatial economic mass. Data from London and surrounding regions is used to calibrate and validate the model. We report its applications in studying suburban road capacity expansion, high speed rail links and suburban and exurban land supply. The model results obtained so far are in line with theoretical expectations and provide new quantification of the costs and benefits that feed into the assessment of those strategies. Some on-going and further developments of the model include (1) All exogenous parameters for setting up the model are subject to further refinement from conducting sensitivity tests with respect to the magnitude of the model responses, (2) Flows between zones can in the future be mapped on to transport networks, e.g. through linking to a detailed transport model, and (3) the model may be extended with a recursive dynamic structure for policy analysis by incremental policy horizons.
    Date: 2012–10
  17. By: Gohin, Alexandre; Rault, Arnaud
    Abstract: Epizootic outbreaks such as Foot and Mouth Disease are of great concern for agriculture. In this paper, we quantify the potential dynamic impacts of such a disease on Brittany, a French region with a strong livestock sector. We develop a dynamic computable general equilibrium model with rational expectations that allows us to measure the impacts of culling infected animals and restraining movements of live animals on the livestock sectors and downstream food industries. Our results show that economic losses are spread over many periods even with a one-time shock. The impacts on the primary sectors and downstream food sectors do not move in parallel. The food industries suffer most in the first period while the negative impacts on agriculture are mostly observed thereafter. Credit and wage constraints result in an estimated aggregated loss multiplied by more than 700 per cent. These results challenge the concept of a simple management policy for this disease.
    Keywords: dynamics, CGE, animal disease, catastrophic event, Livestock Production/Industries, Q11, Q18,
    Date: 2012–04
  18. By: ISOGAWA Daiya; OHASHI Hiroshi
    Abstract: This paper estimates a dynamic oligopoly model of product innovation to evaluate an equilibrium effect of public policy on firms' innovation activities. The model considers a multi-agent Markov-Perfect Nash Equilibrium, allowing for firms' dynamic decision making on innovation activities and entry and exit. The estimation results obtained by using Japanese firm-level data on product innovation identify net positive spillovers among firms' dynamic innovation activities. Simulation exercises based on the obtained estimates indicate that, while the existing subsidies indeed encourage firms' innovation activities, they are far from optimal.
    Date: 2012–10

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.