Balanced Budget Government Spending in a Small Open Regional Economy

This paper investigates the impact of a balanced budget fiscal policy expansion in a regional context within a numerical dynamic general equilibrium model. We take Scotland as an example where, recently, there has been extensive debate on greater fiscal autonomy. In response to a balanced budget fiscal expansion the model suggests that: an increase in current government purchase in goods and services has negative multiplier effects only if the elasticity of substitution between private and public consumption is high enough to move downward the marginal utility of private consumers; public capital expenditure crowds in consumption and investment even with a high level of congestion; but crowding out effects might arise in the short-run if agents are myopic.regional computable general equilibrium analysis, fiscal federalism, fiscal policy.

Rebound Effects from Increased Efficiency in the Use of Energy by UK Households*

In this paper, we use CGE modelling techniques to identify the impact on energy use of an improvement in energy efficiency in the household sector. The main findings are that 1) when the price of energy is measured in natural units, the increase in efficiency yields only to a modification of tastes, changing as a result, the composition of household consumption; 2) when households internalize efficiency, the improvement in energy efficiency reduces the price of energy in efficiency units, providing a source of improved competitiveness as the nominal wage and the price level both fall; 3) the short-run rebound can be greater than the long run rebound if the household demand elasticity is the same for both time frames, however, the short run rebound is always lower than in the long-run if the demand for energy is relatively more elastic in the long-run; 4) the introduction of habit formation changes the composition of household consumption, modifying the magnitude of the household rebound only in the short-run. In this period, household and economy wide rebound are lowest for external habit formation and highest when consumers' preferences are defined using a conventional utility function.Energy efficiency; Rebound effects; Households energy consumption; CGE models.

Long-term Social, Economic and Fiscal Effects of Immigration into the EU: The Role of the Integration Policy: JRC Working Papers in Economics and Finance, 2017/4

The issues of the forced migration and integration of refugees in the EU society and labour markets are high on the policy agenda. Apart from humanitarian aspects, a sustainable integration of accepted refugees is important also for social, economic, budgetary and other reasons. Although, the potential consequences of the refugee acceptance are being often discussed, little scientific evidence has been provided for the policy debate so far in the context of the current refugee crisis. The present study attempts to shed light on the long-run social, economic and budgetary effects of the rapidly increasing forced immigration into the EU by performing a scenario analysis of alternative refugee integration scenarios. Our simulation results suggest that, although the refugee integration (e.g. by the providing language and professional training) is costly for the public budget, in the medium- to long-run, the social, economic and fiscal benefits may significantly outweigh the short-run refugee integration costs. Depending on the integration policy scenario and policy financing method, the annual long-run GDP effect would be 0.2% to 1.4% above the baseline growth, and the full repayment of the integration policy investment (positive net present value) would be achieved after 9 to 19 years.JRC.B.3-Territorial Developmen

Forward Looking and Myopic Regional Computable General Equilibrium Models. How Significant is the Distinction?

We present a stylized intertemporal forward-looking model able that accommodates key regional economic features, an area where the literature is not well developed. The main difference, from the standard applications, is the role of saving and its implication for the balance of payments. Though maintaining dynamic forward-looking behaviour for agents, the rate of private saving is exogenously determined and so no neoclassical financial adjustment is needed. Also, we focus on the similarities and the differences between myopic and forward-looking models, highlighting the divergences among the main adjustment equations and the resulting simulation outcomes.Myopic and Forward-looking Behaviour, Computable General Equilibrium Models, Regional Adjustment.

Balanced Budget Government Spending in a Small Open Regional Economy

Scotland is engaged in a lively and on-going debate on greater fiscal autonomy and independence, which is politically controversial, especially in respect of tax-varying powers. The Scottish Parliament has the power to make a balanced-budget adjustment in public expenditure by varying the basic rate of income tax. While this power has not so far been used, there is considerable pressure further to increase the fiscal powers of the Scottish Government. The object of this paper is to explore and quantify a number of typical balanced-budget government spending shocks. Here we seek to draw on lessons from recent macroeconomic analyses of fiscal policy, but we adapt them to an explicitly regional context. The regional dimension of the analysis is captured through application to a regional economy characterised by: highly open goods markets in which import and export to GDP ratios are much higher than for the national economy; highly open labour markets characterised by the presence of migration and national and regional wage bargaining institutions; financial markets that are perfectly integrated with the national economy with which the region shares a permanently fixed exchange rate. Furthermore, the macroeconomic "closures" of the model are those appropriate to a region, reflecting an institutional structure in which, for example, the system of national transfers moderates the operation of regional adjustment mechanisms. We develop an intertemporal variant of, AMOS, a computable general equilibrium (CGE) model for Scotland to explore the kinds of balanced-budget fiscal expansions that the Scottish Government could pursue. In response to a balanced budget fiscal expansion the model suggests that: an increase in current government purchase in goods and services has negative multiplier effects only if the elasticity of substitution between private and public consumption is high enough to move downward the marginal utility of private consumers; public capital expenditure crowds in consumption and investment but crowding out effects might arise in the short-run if agents are myopic. The distinctive results for public capital expenditure suggest that the current restriction on the composition of Scottish government expenditures is a very significant one

Impact analysis of regional knowledge subsidy: a CGE approach

In this paper we present a computable general equilibrium model for the region of Sardinia for the purpose of evaluating the capacity of R&D policies to affect the long run rate of growth. The model incorporates induced technical change and allow for external knowledge spillovers. We find that the cost of R&D policies may change according to the wage setting prevailing into the region. Furthermore, the capacity of such a policy to generate knowledge spillovers from the international and interregional trade are quite modest. Indeed, the capacity of the regional system to internalize the technological level embody in the imported good is partially offset by an increase in internal efficiency lowering the share of import but increasing competitiveness

The importance of graduates to the Scottish economy : a “micro to macro" approach

There have been numerous attempts to assess the overall impact of Higher Education Institutions on regional economies in the UK and elsewhere. There are two disparate approaches focussing on: demand-side effects of HEIs, exerted through universities’ expenditures within the local economy; HEIs’ contribution to the “knowledge economy”. However, neither approach seeks to measure the impact on regional economies that HEIs exert through the enhanced productivity of their graduates. We address this lacuna and explore the system-wide impact of the graduates on the egional economy. An extensive and sophisticated literature suggests that graduates enjoy a significant wage premium, often interpreted as reflecting their greater productivity relative to non-graduates. If this is so there is a clear and direct supply-side impact of HEI activities on regional economies through the employment of their graduates. However, there is some dispute over the extent to which the graduate wage premium reflects innate abilities rather than the impact of higher education per se. We use an HEI-disaggregated computable general equilibrium model of Scotland to estimate the impact of the growing proportion of graduates in the Scottish labour force that is implied by the current participation rate and demographic change, taking the graduate wage premium in Scotland as an indicator of productivity enhancement. We conduct a range of sensitivity analyses to assess the robustness of our results. While the detailed results do, of course, vary with alternative assumptions about future graduate retention rates and the size of the graduate wage premium, for example, they do suggest that the long-term supply-side impacts of HEIs provide a significant boost to regional GDP. Furthermore, the results suggest that the supply-side impacts of HEIs are likely to be more important than the expenditure impacts that are the focus of most “impact” studies

Does deflation method matter for productivity measures?

In this paper, we argue against the use the double deflation method to produce an equilibrating system of account at a constant price. In fact, by relaxing such a condition, by means of the single deflation method, we obtain a measure of purchasing power transfer that can be decomposed in productivity and market distortion. Results are presented for the evolution of the Italian economy for the periods 1995-2002

Scotland - No Detriment, No Danger : the Inter-Regional Impact of a Balanced Budget Regional Fiscal Expansion

In the Scottish Independence Referendum, the Scottish electorate voted to remain within the UK. However, this did not mean that the institutional arrangements in Scotland would remain unchanged. Legislation already enacted under the 2012 Scotland Act plus the recommendations of the Smith Commission report will give Scotland extensive fiscal powers in the future. However, although there will be a highly devolved structure for taxation and public expenditure, the Scottish economy is closely integrated with the rest of the UK and issues of policy co-ordination and misaligned incentives will almost inevitably arise. The paper develops an extremely simple two-region demand-driven analytical model, which is used to illustrate the nature of inter-regional interaction that would occur as a result of devolved policy initiatives. Our particular focus is the question of balanced budget fiscal expansions. We construct a set of two-region (Scotland/RUK) Industry by Industry Input Output accounts for 2010. These accounts are taken as the data on which Input-Output and Social Accounting Matrix (as well as Computable General Equilibrium) models can be built to calculate the impact of decentralised and devolved policies. The simulation results highlight the potential significance of inter-regional effects and the requirement for accuracy in the size of inter-regional trade flows and critically the need for a more highly developed policy framework to measure such inter-regional spillover impacts

Reducing rebound without sacrificing macroeconomic benefits of increased energy efficiency

Previous research has shown that increased efficiency in the use of energy triggers price and income effects that result in cost- or demand-led economic expansion processes (depending on whether efficiency improves on the production or consumption side of the economy). However, this generates rebound in energy use at the economywide level that partially offsets expected energy savings in the more efficiency activity. The question we set out to address here is whether economy-wide rebound effects can be reduced without sacrificing macroeconomic benefits. We hypothesise that this may be possible if increased efficiency in production leads to a reduction in the relative price of something that is a substitute for an energy-intensive activity elsewhere in the economy. That is by changing the composition of consumption, for example favouring (low carbon) electricity over gas, or public over private transport. We consider the latter example here by simulating an increase in energy efficiency in the provision of public transport in the UK using a computable general equilibrium (CGE) model. The key assumption in our analysis is that private transport is a competing, and relatively energy-intensive substitute for the more efficient public transport provision. Our key finding is that by varying just one parameter in our CGE model – the elasticity governing the extent to which households are prepared to substitute away from private in favour of public transport as the relative price changes in favour of the latter – we get marked variation in the magnitude of the economy-wide rebound effect with negligible (if any) impact on key macroeconomic impacts. That is, we show that it is possible to maximise both macroeconomic benefits and energy savings the more UK households can be persuaded to switch their transportation needs in favour of more efficient and competitive public transport options