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.

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.

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

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

Scottish Fiscal Choices Post-Referendum : Powers, Purpose and Potential Impact

The Referendum on Scottish independence held on the 18th September, 2014, resulted in a significant majority vote (55% as against 45%) in favour of “no”. Accordingly, Scotland will remain a member of the U.K. for the foreseeable future.1 However, further changes in the Scottish fiscal system are inevitable. Firstly, some tax changes are already in the pipeline (for April 2015 and 2016) as a consequence of the provisions of the Scotland Act 2012. Secondly, all of the UK leaders of the main unionist parties committed, in the latter stages of the referendum campaign, to transferring significant additional powers to the Scottish Parliament in the event of a majority no vote.2 Lord Smith of Kelvin Chairs a Commission charged with rapidly generating a proposal for a new devolution settlement for Scotlan

Inverted Haavelmo Effects in a General Equilibrium Analysis of the Impact of Implementing the Scottish Variable Rate of Income Tax.

The Scottish Parliament has the authority to make a balanced-budget expansion or contraction in public expenditure, funded by corresponding local changes in the basic rate of income tax of up to 3p in the pound. This fiscal adjustment is known as the Scottish Variable Rate of income tax, though it has never, as yet, been used. In this paper we attempt to identify the impact on aggregate economic activity in Scotland of implementing these devolved fiscal powers. This is achieved through theoretical analysis and simulation using a Computable General Equilibrium (CGE) model for Scotland. This analysis generalises the conventional Keynesian model so that negative balanced-budget multipliers values are possible, reflecting a regional “inverted Haavelmo effect”. Key parameters determining the aggregate economic impact are the extent to which the Scottish Government create local amenities valuable to the Scottish population and the extent to which this is incorporated into local wage bargaining.Fiscal federalism, devolution, regional wage bargaining and migration, Scotland, regional computable general equilibrium analysis.