Modeling household behavior in a CGE model: linear expenditure system or indirect addilog?

We try to argue that in a computable general equilibrium model, household preferences should be modeled by the indirect addilog system (IAS) rather than by the frequently used linear expenditure system (LES). Both systems have the same data requirement and are as easy to implement, but IAS provides for a richer description of preferences. Contrarily to LES, its Engel curves are non-linear and it allows for inferior commodities, elastic demand and gross substitution. LES assigns zero utility to households with expenditure below a positive minimum value, whereas IAS assigns a positive utility, provided zero expenditure is replaced by a small positive number. In micro simulation models where the results of a macro CGE model (with one representative household) are used at micro level, this constitutes a clear advantage of IAS. In the framework of an expenditure survey, we find overwhelming statistical evidence that the IAS indirect utility function is likely to be (much) closer to the true indirect utility function than LES. Consequently, expenditure elasticities and welfare changes are likely to be (much) better estimated by IAS. Simulations with a CGE model for Palestine show that price responses and equivalent variation are considerably higher for IAS than for LES.

Structural decomposition analysis and index number theory: an empirical application of the Montgomery decomposition.

Abstract In recent years a large number of empirical articles on structural decomposition analysis, which aims at disentangling an aggregate change into its factors, has been published in Economic Systems Research. Dietzenbacher and Los (D&L) proved that in case of n factors the number of possible decompositions is equal to n!, non of which satisfies time reversal. Averages of decompositions satisfy this requirement, such as the average of all decompositions. In index number theory this problem is known as the decomposition of an aggregate change into symmetric factors (usually two: price and quantity). Balk proposes to generalize the Montgomery decomposition, which obeys time reversal, to three factors. In this paper we apply this solution to a more intricate decomposition into four factors, viz. the example analyzed by D&L. We show that for most sectors the results of the Montgomery decomposition are remarkably close to those of the average of the 24 decompositions.decomposition analysis

Economic consequences of intifada: a sequel

We give an assessment of the loss in the nominal gross domestic product (GDP) and nominal gross national income (GNI) due to twenty- seven months of intifada. It is based on the modest growth scenario given by the International Monetary Fund (IMF) and the World Bank (WB) in their first assessment of the economic developments in 2006 in Palestine. It turns out that the assessed loss is equivalent to the GDP of 1997 and the GNI in 1999: one year on two (and a quarter). Moreover, we show that our 2004 estimates of macro figures of 2002, based on a static computable general equilibrium model, are closer to the 2007 consensus estimates by IMF and WB than the 2003 estimates of IMF, based on an income-expenditure model. We argue that the shortening of the time horizon and the quantity adjustment following the dramatic shock explain why our model performs better.Palestine;macro-economic indicators;computable general equilibrium model

Ridge regression revisited

We argue in this paper that general ridge (GR) regression implies no major complication compared with simple ridge regression. We introduce a generalization of an explicit GR estimator derived by Hemmerle and by Teekens and de Boer and show that this estimator, which is more conservative, performs better than the Hoerl and Kennard estimator in terms of a weighted quadratic loss criterion.general ridge estimator;MSE performance

Lack of peaceful resolution with Israel: economic cost for Palestinians

We propose to estimate the economic cost for Palestine and for Palestinian residents due to the lack of peaceful resolution with Israel. Thereto we make use of the consensus estimates of the International Monetary Fund (IMF) and the World Bank (WB) of real growth rates of economic variables and of the nominal national accounts for Palestine over the period 1994-2006. We identify four periods: 1994-1999 with high real growth rates of gross domestic product (GDP) and of gross national income (GNI); 2000-2002 with a strong decline; 2003-2005 with a modest growth; and 2006 with a renewed decline. We derive the real national accounts (prices1999) for the end years: 1999, 2002 and 2005. It follows that over 2000-2002 the real GDP declined by 27.5%; GNI by almost one third; but that real gross disposable income (GDI) “only†declined by 11.3%; and that over 2000-2005 the declines were 13.8% (GDP) ; about 20%(GNI); and 2.9% (GDI), respectively. Consequently, in 2005, the year preceding the renewed isolation of Palestine, real GDP, GNI and GDI were still below their 1999 level. Based on the modest growth scenario of IMF and WB (3% real growth and 3% price increase) we estimate that over the period 2000-2002 the cost for Palestine, measured in terms of nominal GNI, was equal to the GNI of 1999 (5.5 billion US$), and over 2000-2005 to two-and-a-half times the 1999 GNI. Based on the same growth scenario, we estimate the loss for a Palestinian resident, measured in terms of nominal GDI per capita, to be 30% of the 1999 level by the end of 2002 and 25% by the end of 2005.Palestine;macro-economic indicators;economic cost

Introducing the indirect addilog system in a computable general equilibrium model: a case study for Palestine

A popular functional form for modeling the consumption block of a computable general equilibrium model (CGE) is the Linear Expenditure System (LES) for which the Engel curves are straight lines. To allow for more general shapes two other systems have been proposed in recent literature: An Implicitly Directly Additive Demand System (AIDADS, a generalization of LES) and the Specialized Constant Differences of Elasticities (CDE) system. To calibrate the parameters outside information on all income elasticities and all own price elasticities is needed, whereas LES only requires information on income elasticities and the Frisch parameter. In this paper we consider a special case of CDE, the Indirect Addilog System (IAS) that allows for non-straight Engel curves, whereas its outside data requirement is the same as for LES. The only disadvantage is that all cross price elasticities of a particular price are the same. In many developing countries there is hardly any information on price responses so that the AIDADS and CDE cannot be used. We propose the use of IAS rather than LES. In the empirical part we use IAS in a CGE model for Palestine and show that predictions of macro-economic indicators are remarkably close to those of IMF.Palestine;CGE model;indirect addilog system;consumption block;functional forms

Economic consequences of intifada

In 2003 the World Bank (WB) and the International Monetary Fund (IMF) published estimates of macro-economic indicators for 2002 of the economy of Palestine. WB used a micro-founded recursive dynamic computable general equilibrium (CGE) model, calibrated on the 1998 Social Accounting Matrix (SAM) of Palestine, to which shocks were applied, whereas IMF based its estimates on a macro-founded income-expenditure model relying on more recent data. It turned out that there were substantial differences: the estimate by WB of the real Gross National Income (at 1998 prices) was 25% less than the corresponding figure calculated by IMF. This huge difference is not only relevant for a full understanding of the economic consequences of the intifada, but also for the size of the international community intervention. In this paper we propose our own evaluation with the help of a static CGE model, based on the 1998 SAM and the so-called intifada shock derived from data of WB, that we constructed for the analysis of some forms of emergency assistance in a previous article. It turns out that our estimates, based on an entirely different methodology, are remarkably close to those of IMF.Palestine;macro-economic indicators;computable general equilibrium model

Modeling household behavior in a CGE model: linear expenditure system or indirect addilog?

We try to argue that in a computable general equilibrium model, household preferences should be modeled by the indirect addilog system (IAS) rather than by the frequently used linear expenditure system (LES). Both systems have the same data requirement and are as easy to implement, but IAS provides for a richer description of preferences. Contrarily to LES, its Engel curves are non-linear and it allows for inferior commodities, elastic demand and gross substitution. LES assigns zero utility to households with expenditure below a positive minimum value, whereas IAS assigns a positive utility, provided zero expenditure is replaced by a small positive number. In micro simulation models where the results of a macro CGE model (with one representative household) are used at micro level, this constitutes a clear advantage of IAS. In the framework of an expenditure survey, we find overwhelming statistical evidence that the IAS indirect utility function is likely to be (much) closer to the true indirect utility function than LES. Consequently, expenditure elasticities and welfare changes are likely to be (much) better estimated by IAS. Simulations with a CGE model for Palestine show that price responses and equivalent variation are considerably higher for IAS than for LES

Multiplicative decomposition and index number theory: an empirical application of the Sato-Vartia decomposition

Abstract In De Boer (2006) the additive decomposition of the aggregate change in a variable into its factors was considered. I proposed to use the "ideal" Montgomery decomposition, developed in index number theory, rather than the commonly used methods in structural decomposition analysis and applied it to the example analyzed by Dietzenbacher and Los (1998) (D&L). In this paper I consider the multiplicative decomposition and argue that from a theoretical point of view the "ideal" Sato-Vartia decomposition is to be preferred to the geometric average of the polar decompositions and that from a computational point of view it is to be preferred to the geometric average of all elementary decompositions. Application to the example of D&L reveals that the three methods yield results that are very close to each other

Lack of peaceful resolution with Israel: economic cost for Palestinians

We propose to estimate the economic cost for Palestine and for Palestinian residents due to the lack of peaceful resolution with Israel. Thereto we make use of the consensus estimates of the International Monetary Fund (IMF) and the World Bank (WB) of real growth rates of economic variables and of the nominal national accounts for Palestine over the period 1994-2006. We identify four periods: 1994-1999 with high real growth rates of gross domestic product (GDP) and of gross national income (GNI); 2000-2002 with a strong decline; 2003-2005 with a modest growth; and 2006 with a renewed decline. We derive the real national accounts (prices1999) for the end years: 1999, 2002 and 2005. It follows that over 2000-2002 the real GDP declined by 27.5%; GNI by almost one third; but that real gross disposable income (GDI) “only” declined by 11.3%; and that over 2000-2005 the declines were 13.8% (GDP) ; about 20%(GNI); and 2.9% (GDI), respectively. Consequently, in 2005, the year preceding the renewed isolation of Palestine, real GDP, GNI and GDI were still below their 1999 level. Based on the modest growth scenario of IMF and WB (3% real growth and 3% price increase) we estimate that over the period 2000-2002 the cost for Palestine, measured in terms of nominal GNI, was equal to the GNI of 1999 (5.5 billion US$), and over 2000-2005 to two-and-a-half times the 1999 GNI. Based on the same growth scenario, we estimate the loss for a Palestinian resident, measured in terms of nominal GDI per capita, to be 30% of the 1999 level by the end of 2002 and 25% by the end of 2005