A Multi-Regional Computable General Equilibrium Model for New Zealand

<p>Although New Zealand has had an active CGE modelling community since the 1980's, a multi-regional CGE model for the country has not been developed until now. This thesis presents a prototype multi-regional CGE model to demonstrate the feasibility of developing a comprehensive model that captures the benefits of modelling agent behaviour with a bottom-up approach. The prototype model is built upon bottom-up regional micro-foundations and New Zealand data is used to operationalise a particular implementation of the model. The thesis fills an important gap in the New Zealand CGE modelling literature as none of the models in current use have a structure involving bottom-up regional modelling. The method of implementation is also a key contribution, utilising a maximum-entropy approach to overcome data shortages. An illustrative simulation of a natural disaster that strikes the Wellington central business district demonstrates the strengths of the bottom-up multi-regional approach - that the model can capture differential effects across regions of shocks that occur at the regional level, and incorporate flow-on and feedback effects between regions. Sensitivity testing of the substitution elasticity between domestic sources of products reinforces the importance of empirically-estimated parameters in CGE models. The basic model is extended in two ways. The first is to introduce modelling of distribution services as has been done in the ORANI and subsequently FEDERAL models. The key structural difference here is that products identified as distribution services are required to facilitate movement of other products from seller to buyer. Thus there are no opportunities to substitute away from these services if they become relatively more expensive. To implement the additional structure, sets of coefficients are specified to control technical possibilities in the usage of the distribution services. These include switches that can dictate, for example, that wholesale trade is only involved in the delivery of tangible products, that retail trade is only used by in-region purchasers, and that transport is required for moving physical products across regional borders or to exporters. That these assumptions can be integrated seamlessly into the database highlights the strength of the maximum-entropy approach used to generate the multi-regional input-output database. Simulations of an oil price shock show that the regional assumptions surrounding the distribution networks are material to the results. The second extension to the model is the addition of a module to control the degree of inter-regional labour mobility. Essentially the user is given the ability to specify the extent to which households respond to regional real wage di erences by moving to regions with relatively higher rates. Therefore, in short-run simulations labour can be made more mobile than capital, while in the long-run it can be less mobile than capital. The module also introduces additional structure to link populations, households, and labour market components. One important element of this new structure is a link back to the endogenous labour supply theory of the basic model. Publicly available demographic and labour market data are used to implement the mobility module. The importance of a mobility response to relative real wage changes is explored in an illustrative application looking at the impact of regionally-concentrated immigration flows. The simulations suggest that population movements can work to dissipate the welfare effects of such migration inflows.</p>

A Multi-Regional Computable General Equilibrium Model for New Zealand

<p>Although New Zealand has had an active CGE modelling community since the 1980's, a multi-regional CGE model for the country has not been developed until now. This thesis presents a prototype multi-regional CGE model to demonstrate the feasibility of developing a comprehensive model that captures the benefits of modelling agent behaviour with a bottom-up approach. The prototype model is built upon bottom-up regional micro-foundations and New Zealand data is used to operationalise a particular implementation of the model. The thesis fills an important gap in the New Zealand CGE modelling literature as none of the models in current use have a structure involving bottom-up regional modelling. The method of implementation is also a key contribution, utilising a maximum-entropy approach to overcome data shortages. An illustrative simulation of a natural disaster that strikes the Wellington central business district demonstrates the strengths of the bottom-up multi-regional approach - that the model can capture differential effects across regions of shocks that occur at the regional level, and incorporate flow-on and feedback effects between regions. Sensitivity testing of the substitution elasticity between domestic sources of products reinforces the importance of empirically-estimated parameters in CGE models. The basic model is extended in two ways. The first is to introduce modelling of distribution services as has been done in the ORANI and subsequently FEDERAL models. The key structural difference here is that products identified as distribution services are required to facilitate movement of other products from seller to buyer. Thus there are no opportunities to substitute away from these services if they become relatively more expensive. To implement the additional structure, sets of coefficients are specified to control technical possibilities in the usage of the distribution services. These include switches that can dictate, for example, that wholesale trade is only involved in the delivery of tangible products, that retail trade is only used by in-region purchasers, and that transport is required for moving physical products across regional borders or to exporters. That these assumptions can be integrated seamlessly into the database highlights the strength of the maximum-entropy approach used to generate the multi-regional input-output database. Simulations of an oil price shock show that the regional assumptions surrounding the distribution networks are material to the results. The second extension to the model is the addition of a module to control the degree of inter-regional labour mobility. Essentially the user is given the ability to specify the extent to which households respond to regional real wage di erences by moving to regions with relatively higher rates. Therefore, in short-run simulations labour can be made more mobile than capital, while in the long-run it can be less mobile than capital. The module also introduces additional structure to link populations, households, and labour market components. One important element of this new structure is a link back to the endogenous labour supply theory of the basic model. Publicly available demographic and labour market data are used to implement the mobility module. The importance of a mobility response to relative real wage changes is explored in an illustrative application looking at the impact of regionally-concentrated immigration flows. The simulations suggest that population movements can work to dissipate the welfare effects of such migration inflows.</p>

Asset Prices and Pandemics: The Effects of Lockdowns

We examine the impact of pandemics on equilibrium in an integrated epidemic-economy model with production. Two types of technologies are considered: a neo-classical technology and one capturing the notion of time-to-produce. The impact of a shelter-in-place policy with and without layoffs is studied. The paper documents adjustments in interest rate, market price of risk, stock market and real wage as the epidemic propagates. It shows the qualitative effects of a shelter-in-place policy in the model are consistent with the patterns displayed by the stock market and real wage during the COVID-19 outbreak. Puzzles emerging from the analysis are outlined.

A Simple Course in Capital Theory: A Misunderstood Debate

This short paper is a demonstration of the difficulty with the textbook production function which uses the notion of capital as a factor of production. Because, this notion is logically incompatible with the other notion of the money value of capital needed for distribution theory. Theories of production and distribution become incompatible. Outside a one commodity world, this leads to insurmountable circular reasoning. The value of capital cannot be measured without first knowing its distributional parameters (e.g. real wage or the profit rate) and if they are known the marginal productivity theory based on the notion of the relative scarcity of capital as a factor of production is not only superfluous but meaningless. The scarcity of something which cannot be measured even in theory cannot be defined.

Real Wage Chronologies

Real Wage Chronologies

The Recovery from the Great Recession: A Long, Evolving Expansion

Prior to 2020, the Great Recession was the most important macroeconomic shock to the United States’ economy in generations. Millions lost jobs and homes. At its peak, one in ten workers who wanted a job could not find one. On an annual basis, the economy contracted by more than it had since the Great Depression. A slow and steady recovery followed the Great Recession’s official end in summer 2009, but because it was slow and the depth of the recession so deep, it took years to reduce slack in labor markets. But because the recovery lasted so long, many pre-recession peaks were exceeded, and eventually real wage growth accumulated for workers across the distribution. In fact, the business cycle (including recession and recovery) beginning in December 2007 was one of the better periods of real wage growth in many decades, with the bulk of that coming in the last years of the recovery.

The Cyclical Behavior of Job Quality and Real Wage Growth

We study the empirical relevance of implicit insurance contracts for wage setting while accounting for cyclical fluctuations in average job quality. Using proxy measures, we find the latter to be acyclical, if not countercyclical, due to the cleansing effects of layoffs during recessions versus quits during expansions. Then, we study the cyclical behavior of wage growth among job stayers to test for contracts, circumventing differences in job quality altogether. Both methods strongly corroborate the prevalence of wage contracts in the labor market and imply a highly procyclical price for labor. (JEL E24, E32, J31, J41, J63)