nep-cmp New Economics Papers
on Computational Economics
Issue of 2014‒05‒04
fourteen papers chosen by
Stan Miles
Thompson Rivers University

  1. Economic evaluation of the Diamer-Basha dam: Analysis with an integrated economic/water simulation model of Pakistan: By Robinson, Sherman; Gueneau, Arthur
  2. Adding financial flows to a CGE model of PNG By Peter Dixon; Maureen Rimmer; Louise Roos
  3. An algorithmic approach for simulating realistic irregular lattices By Juan C. Duque; Alejandro Betancourt; Freddy Marin
  4. On automatic derivation of first order conditions in dynamic stochastic optimisation problems By Klima, Grzegorz; Retkiewicz-Wijtiwiak, Kaja
  5. Accuracy, Speed and Robustness of Policy Function Iteration By Todd B. Walker; Alexander W. Richter; Nathaniel A. Throckmorton
  6. Climate Impacts in Europe. The JRC PESETA II Project By CISCAR MARTINEZ Juan Carlos; FEYEN Luc; SORIA RAMIREZ Antonio; LAVALLE Carlo; PERRY Miles; RAES Frank; NEMRY Francoise; DEMIREL Hande; RÓZSAI Máté; DOSIO Alessandro; DONATELLI Marcello; SRIVASTAVA Amit Kumar; FUMAGALLI Davide; NIEMEYER Stefan; SHRESTHA Shailesh; CIAIAN Pavel; HIMICS Mihaly; VAN DOORSLAER Benjamin; BARRIOS Salvador; IBANEZ RIVAS Juan Nicolás; FORZIERI Giovanni; ROJAS MUJICA Rodrigo Felipe; BIANCHI Alessandra; DOWLING Paul; CAMIA Andrea; LIBERTA Giorgio; SAN-MIGUEL-AYANZ Jesus; DE RIGO Daniele; CAUDULLO Giovanni; BARREDO CANO Jose Ignacio; PACI Daniele; PYCROFT Jonathan; SAVEYN Bert; REVESZ Tamas; BARANZELLI Claudia; VANDECASTEELE Ine; BATISTA E SILVA Filipe; IBARRETA RUIZ Dolores
  7. Exchange rate misalignment in Pakistan and its general equilibrium distributional implications: By Debowicz, Dario; Saeed, Wajiha
  8. The Effectiveness Of Different Trading Strategies For Price-Takers By Liudmila G. Egorova
  9. From Minority Games to $-Games By Jørgen Vitting Andersen
  10. The Krusell-Smith Algorithm: Are Self-fulfilling Equilibria Likely? By Marco Cozzi
  11. Financial Symmetry and Moods in the Market. By Roberto Savona; Maxence Soumare; Jørgen Vitting Andersen
  12. Can Pakistan have creative cities? An agent based modeling approach with preliminary application to Karachi: By Malik, Ammar A.; Crooks, Andrew T.; Root, Hilton L.
  13. Editorial for the Special Issue on 'Computational Methods for Russian Economic and Financial Modelling' By Fantazzini, Dean
  14. Expérimentation et apprentissage en matière de négociation : Une présentation des principaux modèles de simulation By Claude Alavoine

  1. By: Robinson, Sherman; Gueneau, Arthur
    Abstract: This paper describes the potential impact on the economy of Pakistan of building the Diamer-Basha dam. An integrated system of economic and water simulation models is applied to Pakistan to analyze the economywide impacts of changes in water resources in the Indus river basin, focusing on agricultural and hydropower benefits provided by the Diamer-Basha dam under different climate scenarios. The model framework links separate economic and water models, drawing on the strengths of both approaches without having to compromise by specifying either a simplified treatment of water in an economic model or simplified economics in a water model. The model system is used to simulate the impact of economic growth and changes in water resources over the long run, focusing on agriculture and hydropower. The results of scenario analysis indicate that the Diamer-Basha dam would improve the resilience of Pakistan to adapt to climate shocks, providing increased hydropower capacity and enhanced ability to manage the water system to offset climate-induced variation in river flows.
    Keywords: Rivers, Watersheds, Irrigation, Climate change, Dams, Computable General Equilibrium (CGE) model, Computable General Equilibrium water model,
    Date: 2014
  2. By: Peter Dixon; Maureen Rimmer; Louise Roos
    Abstract: Traditionally, CGE models do not include equations modelling the financial sector of a country. Interest rates are therefore set exogenously and often the nominal exchange rate is set as the numeraire. Normally, these models would show that tighter monetary policy (i.e. increase in interest rates) would lead to a fall in investments and a decline in the domestic price level relative to foreign prices. This causes a real devaluation of the currency. The fall in domestic prices would be good for the trade balance because the country becomes more competitive with exports increasing and imports falling. However, there is another mechanism not captured in these models. If interest rates increase, we expect that foreigners would want to hold more domestic assets (due to the higher returns) and domestic agents would want to hold more domestic assets and less foreign assets. We expect a net inflow of capital and an appreciation of the currency. This appreciation would then hurt the trade account. Our task is to develop a financial module and run simulations to investigate the impact of tighter monetary policy in Papua New Guinea (PNG). The financial module is a set of equations that are added, as an extension, to an existing comparative-static model for PNG, see Kauzi (2003). The comparative-static model of PNG is an ORANIG-style model and includes the core economic equations. In this paper we do not explain the equations of the core economic module. For a detailed description of the core module, see Dixon et al. (1982). The financial module is linked to the core CGE model via three conditions. Firstly, the current account deficit is equal to the net inflow of capital. Secondly, the government deficit is equal to the new acquisition of domestic bonds. Thirdly, investment in industry i is set equal to the new acquisition of assets in industry i by agents z. Once these equations are activated, we endogenously determine the nominal exchange rate, domestic bond rate and the change in the cost of funds to industries. In this paper we describe the theory underlying the financial module. We simulate a 1 per cent increase in the interest rate the BPNG pays to the commercial banks for holding deposits with the BPNG. The first two simulations with the comparative-static module are conducted with the financial module inoperative. This means that the financial module is not linked to the core economic module and that the nominal exchange rate and rates of interest are set exogenously. We expect the results of these two simulations to show that tighter monetary policy leads to an improvement in the trade balance. In simulations 3 we activate the first condition where we set the current account balance equal to the net capital inflow. This allows us to endogenously determine the nominal exchange rate. In simulation 4 we activate the second condition where we set the government deficit equal to the issuing of domestic bonds. We can now endogenously determine the domestic bond rate. In simulation 5 we activate the final constraint where we endogenously determine the change in the cost of lending funds to industries. By activating all the conditions we linked the financial module to the core economic module. We expect the results of the final three simulations to show that tighter monetary policy leads to a worsening of the trade balance.
    Keywords: Computable general equilibrium (CGE) models, Financial markets, Interest rates, Monetary Policy
    JEL: C68 E44 E47 E52
    Date: 2014–02
  3. By: Juan C. Duque; Alejandro Betancourt; Freddy Marin
    Abstract: There is a wide variety of computational experiments, or statistical simulations, in which regional scientists require regular and irregular lattices with a predefined number of polygons. While most commercial and free GIS software offer the possibility of generating regular lattices of any size, the generation of instances of irregular lattices is not a straightforward task. The most common strategy in this case is to find a real map that matches as closely as possible the required number of polygons. This practice is usually conducted without considering whether the topological characteristics of the selected map are close to those for an “average” map sampled in different parts of the world. In this paper, we propose an algorithm, RI-Maps, that combines fractal theory, stochastic calculus and computational geometry for simulating realistic irregular lattices with a predefined number of polygons. The irregular lattices generated with RI-Maps have guaranteed consistency in their topological characteristics, which reduces the potential distortions in the computational or statistical results due to an inappropriate selection of the lattices.
    Keywords: RI-Maps; MR-Polygons; Regional Science; Lattices; Computation, Experiment
    JEL: C02 C63
    Date: 2013–07–12
  4. By: Klima, Grzegorz; Retkiewicz-Wijtiwiak, Kaja
    Abstract: This note presents an algorithm for deriving first order conditions applicable to the most common optimisation problems encountered in dynamic stochastic models automatically. Given a symbolic library or a computer algebra system one can efficiently derive first order conditions which can then be used for solving models numerically (steady state, linearisation).
    Keywords: DSGE; stochastic optimisation; first order conditions; symbolic computations
    JEL: C61 C63 C68
    Date: 2014–04–28
  5. By: Todd B. Walker; Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: Policy function iteration methods for solving and analyzing dynamic stochastic general equilibrium models are powerful from a theoretical and computational perspective. Despite obvious theoretical appeal, significant startup costs and a reliance on grid-based methods have limited the use of policy function iteration as a solution algorithm. We reduce these costs by providing a user-friendly suite of MATLAB functions that introduce multi-core processing and Fortran via MATLAB's executable function. Within the class of policy function iteration methods, we advocate using time iteration with linear interpolation. We examine a canonical real business cycle model and a new Keynesian model that features regime switching in policy parameters, Epstein-Zin preferences, and monetary policy that occasionally hits the zero-lower bound on the nominal interest rate to highlight the attractiveness of our methodology. We compare our advocated approach to other familiar iteration and approximation methods, highlighting the tradeoffs between accuracy, speed and robustness.
    Keywords: Policy function iteration; Zero lower bound; Epstein-Zin preferences; Markov switching; Chebyshev polynomials; Real business cycle model; New Keynesian model
    JEL: C63 C68 E52 E62
    Date: 2014–04
  6. By: CISCAR MARTINEZ Juan Carlos (European Commission – JRC - IPTS); FEYEN Luc (European Commission – JRC - JRC.H.7); SORIA RAMIREZ Antonio (European Commission – JRC - IPTS); LAVALLE Carlo (European Commission – JRC - JRC.H.8); PERRY Miles (European Commission – JRC - IPTS); RAES Frank (European Commission – JRC - JRC.H.7); NEMRY Francoise (European Commission – JRC - IPTS); DEMIREL Hande (European Commission – JRC - IPTS); RÓZSAI Máté (European Commission – JRC - IPTS); DOSIO Alessandro (European Commission – JRC - JRC.H.7); DONATELLI Marcello (European Commission – JRC - JRC.H.4); SRIVASTAVA Amit Kumar (European Commission – JRC - JRC.H.4); FUMAGALLI Davide (European Commission – JRC - JRC.H.4); NIEMEYER Stefan (European Commission – JRC - JRC.H.4); SHRESTHA Shailesh; CIAIAN Pavel (European Commission – JRC - IPTS); HIMICS Mihaly; VAN DOORSLAER Benjamin (European Commission – JRC - IPTS); BARRIOS Salvador (European Commission – JRC - IPTS); IBANEZ RIVAS Juan Nicolás (European Commission – JRC - IPTS); FORZIERI Giovanni (European Commission – JRC - JRC.H.7); ROJAS MUJICA Rodrigo Felipe (European Commission – JRC - JRC.H.7); BIANCHI Alessandra (European Commission – JRC - JRC.H.7); DOWLING Paul; CAMIA Andrea (European Commission – JRC - JRC.H.3); LIBERTA Giorgio (European Commission – JRC - JRC.H.3); SAN-MIGUEL-AYANZ Jesus (European Commission – JRC - JRC.H.3); DE RIGO Daniele (European Commission – JRC - JRC.H.3); CAUDULLO Giovanni (European Commission – JRC - JRC.H.3); BARREDO CANO Jose Ignacio (European Commission – JRC - JRC.H.3); PACI Daniele (European Commission – JRC - JRC.F.7); PYCROFT Jonathan (European Commission – JRC - IPTS); SAVEYN Bert (European Commission – JRC - IPTS); REVESZ Tamas; BARANZELLI Claudia (European Commission – JRC - JRC.F.8); VANDECASTEELE Ine (European Commission – JRC - JRC.F.8); BATISTA E SILVA Filipe (European Commission – JRC - JRC.F.8); IBARRETA RUIZ Dolores (European Commission – JRC - IPTS)
    Abstract: The purpose of the JRC PESETA II project is to gain insights on the sectoral and regional pattern of the impacts of climate change in Europe by the end of this century. The assessment concerns both the biophysical and economic impacts of climate change. The study has as new elements a large set of impact categories (a total of ten: agriculture, energy, river floods, droughts, forest fires, transport infrastructure, coasts, tourism, habitat suitability of forest tree species and human health) and climate model simulations (a maximum of fifteen for some impact sectors). Six of those impacts are integrated into an economic setup (agriculture, energy, river floods, forest fires, transport infrastructure and coasts). This report details the main methodological aspects of the integrative project and discusses the main results, both in biophysical impact and economic impact terms.
    Keywords: Environmental economics, greenhouse gas emissions reduction, green tax reform, energy tax, energy-intensive sectors, competitiveness, multi-sectoral, computable general equilibrium model (CGE), scenario-building techniques, climate change impacts and adaptation assessment
    Date: 2014–04
  7. By: Debowicz, Dario; Saeed, Wajiha
    Abstract: Recent findings in the growth literature suggest that developing countries need to keep a devalued exchange rate to stimulate their economic growth. Building on these findings, we econometrically evaluate to what ex-tent the real exchange rate of Pakistan has been aligned with its economic fundamentals, and find that the Pa-kistan rupee has been significantly and systematically overvalued during the last years. We then simulate the general equilibrium effects of an eventual re-alignment of the real exchange rate with economic fundamen-tals, and find not only an expected increase in the relative size of the tradable sector - where productivity in-creases tend to be faster – but also an associated improvement in the income of the poorest groups.
    Keywords: economic growth, exchange rate, trade, Markets, Computable General Equilibrium (CGE) model,
    Date: 2014
  8. By: Liudmila G. Egorova (National Research University Higher School of Economics)
    Abstract: Simulation models of the stock exchange are developed to explore the dependence between a trader’s ability to predict future price movements and her wealth and probability of bankruptcy, to analyze the consequences of margin trading with different leverage rates and to compare different investment strategies for small traders. We show that in the absence of margin trading the rate of successful predictions should be slightly higher than 50% to guarantee with high probability that the final wealth is greater than the initial and to assure very little probability of bankruptcy, and such a small value explains why so many people try to trade on the stock exchange. However if trader uses margin trading, this rate should be much higher and high rate leads to the risk of excessive losses.
    Keywords: agent-based system, simulation, stock exchange, trading strategies.
    JEL: G02 G17
    Date: 2014
  9. By: Jørgen Vitting Andersen (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne)
    Abstract: In this chapter we will first argue for the use of game theory/agent-based modeling, to go beyond the standard methods used in traditional approach of Finance. First will be introduced some very general thoughts of elements needed in a new framework for Finance. Then some few concrete examples of heterogeneous agent-based models will be introduced and several of their main results will be discussed. Finally applications and methods to real market data will be introduced, notably the idea of "decoupling" to explain the short-lasting synchronization of investors.
    Keywords: Agent-based modeling; price formation
    Date: 2014–04–07
  10. By: Marco Cozzi (Queen's University)
    Abstract: I investigate whether the popular Krusell and Smith algorithm used to solve heterogeneous-agent economies with aggregate uncertainty and incomplete markets is likely to be subject to multiple self-fulfilling equilibria. In a benchmark economy, the parameters representing the equilibrium aggregate law of motion are randomly perturbed 500 times, and are used as the new initial guess to compute the equilibrium with this algorithm. In a sequence of cases, differing only in the magnitude of the perturbations, I do not find evidence of multiple self-fulfilling equilibria. The economic reason behind the result lies in a self-correcting mechanism present in the algorithm: compared to the equilibrium law of motion, a candidate one implying a higher (lower) expected future capital reduces (increases) the equilibrium interest rates, increasing (reducing) the savings of the wealth-rich agents only. These, on the other hand, account for a small fraction of the population and cannot compensate for the opposite change triggered by the wealth-poor agents, who enjoy higher (lower) future wages and increase (reduce) their current consumption. Quantitatively, the change in behavior of the wealth-rich agents has a negligible impact on the determination of the change in the aggregate savings, inducing stability in the algorithm as a by-product.
    Keywords: Unemployment Risk, Business Cycles, Incomplete Markets, Heterogeneous Agents, Numerical Methods, Self-fulfilling Equilibria
    JEL: C63 C68 E21 E32
    Date: 2014–04
  11. By: Roberto Savona (University of Brescia - Department of Economics and Management); Maxence Soumare (Université de Nice-Sophia Antipolis - Laboratoire J-A.Dieudonné); Jørgen Vitting Andersen (Centre d'Economie de la Sorbonne)
    Abstract: This paper introduces a theoretical framework for collective decision making to describe fluctuations and transitions in financial markets. Investors are assumed to be boundedly rational, using a limited set of information including past price history and expectation on future dividends. Investment strategies are dynamically changed based on realized returns within a game theoretical scheme with Nash equilibria. In such a setting, markets behave as complex systems whose payoff reflect an intrinsic financial symmetry that guarantees equilibrium in price dynamics (fundamentalist state) until the symmetry is broken leading to bubble or anti-bubble scenarios (speculative state). We model such two-phase transition in a micro-to-macro scheme through a Ginzburg-Landau-based power expansion leading to a market temperature parameter which modulates the state transitions in the market. Via simulation we prove that complex market dynamics can be phenomenologically explained by the number of traders, the strategies used by agents and the past price history, all included in our market temperature parameter.
    Keywords: Agent-based modelling, game theory, Ginzburg-Landau theory, financial symmetry.
    JEL: G14 C73
    Date: 2014–03
  12. By: Malik, Ammar A.; Crooks, Andrew T.; Root, Hilton L.
    Abstract: The form and function of many cities are increasingly marred by congestion, sprawl and socioeconomic segregation, preventing them from experiencing expected productivity gains associated with urbanization. We operationalize these insights by creating a stylized agent-based model of a theoretical city, inspired by social complexity theory and the new urban literature.
    Keywords: urban areas, urban population,
    Date: 2013
  13. By: Fantazzini, Dean
    Abstract: This double-issue contains 11 papers invited for the first special issue on “Computational methods for Russian economic and financial modelling”. It was an attempt to explore and bring together practical, state-of-the-art applications of computational techniques with a particular focus on Russia and the Commonwealth of Independent States. The response was beyond expectations and managed to cover a wide range of issues, so that a double-issue was considered: the first dealing with Finance and the second with Economics.
    Keywords: Forecasting; oil price; Google; Russian stock market; T-distribution with vector degrees of freedom; portfolio management; Fund manager; Russian banking sector; Credit Risk; DSGE; Russia; Immigrants; Intertemporal general equilibrium model; Intertemporal equilibrium; Inflation; Inflation expectations;
    JEL: C02 C11 C22 C32 C61 C68 E5 G1 G2 J0 J1
    Date: 2014
  14. By: Claude Alavoine
    Abstract: Expérimentation et apprentissage en matière de
    Date: 2014–04–29

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