WIOD Conference: Industry-Level Analysis of Globalization and its Consequences

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Dynamic Inter-Regional Econometric IO
ModellingKurt KratenaGerhard StreicherMichael
Wueger

• WIOD Conference Industry-Level Analysis of
  Globalization and its Consequences
• Vienna, 26 28, May, 2010

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Modelling Activities Past and Present

• Past
• National level MultiMACI-IV, PROMETEUS
• Regional level (9 provinces) MultiREG
• Present
• Local model (99 districts) ETMOS
• Planned/Ongoing
• New national model DEIO Dynamic Econometric
  Input-Output Model
• From this, derivation of family of regional
  models
• (essentially) identical model structure
• Sub-Austrian level
• 9 provinces
• 99 districts
• Supra-Austrian level
• 27 EU members

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General Characteristics of national Model DEIO

• Data Base
• Supply-Use Tables
• 2-digit NACE(2003) and CPA-level
• Utilization of complete information provided by
  EUROSTAT (or national statistical offices)
• Modelling Structure
• Quantity and price model
• Dynamic models of private consumption and
  production
• Intertemporal optimisation of households with
  durables and liquidity constraints
• Cost function and factor demand with short term
  fixed input (K) in a dynamic duality model
• Endogenous commodity structures
• AIDS for private consumption
• Armington (CES) function for import demand
• frame shifting in intermediate demand

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From national to regional

• Idea use essentially identical model structure
  at different geographical levels
• One new element in model structure
• trade matrix (inter-regional linkages)
• Data decreasing data availability with
  increasing geographical detail
• Some information on 9 province-level
• Very limited information on 35 NUTS3-level
• Almost no information on level of districts
• When no information at regional level
• simple breakdown of last available regional
  level
• Trade matrix increasing reliance on transport
  statistics

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From national to regional

• Example sectoral output , value added,
  employment
• National level Full national account-information
• 9 Province level Regional analysis of primary
  statistics at the firm level (materials inputs,
  production statistics)
• 99 districts breakdown of province values using
  employment data
• Assumption within one province, sectors show
  identical stucture in all districts
• Example private consumption
• Regionalisation based on official consumer survey
• Utilization of information concerning demographic
  composition (age structure, educational
  characteristics)
• Here, we do not employ the assumption of
  identical structures below the province level

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Interregional Linkages

• Private Consumption
• Commuting
• Regional re-distribution of regional value added
  (wages/profits) to regional income
• Shopping
• Regional re-distribution of place of demand for
  consumption goods
• Tourism
• Regional re-distribution of leisure expenditure
• Data Base official statistics (Commuters,
  Overnight Stays) and various official and
  commercial sources (Shopping Surveys)
• Inter-regional Trade
• Balancing of regional demand and regional supply

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Interregional Trade

• Trade Matrix
• Trade survey (MultiREG, 2001) among firms with
  tradeable products and wholesalers feasibility
  of new trade survey
• Result trade matrix at level of 9 provinces
• Update using transport data
• Transport data also used for further
  disaggregation to district level
• Not without problems (classifications NSTR vs.
  CPA modal split statistical problems,.)
• But We have access to transport data of quite
  high quality
• Verkehrsprognose 2025 a projection of future
  traffic trends
• Collaboration of traffic scientists and
  economists
• One result a very detailed description of
  current (2002, 2005) transport flows, involving a
  thorough overhaul of official transport statistics

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Interregional Trade

• Consistent trade matrix derived by balance of
  goods
• for each good, regional demand equals regional
  supply gt balancing algorithm
• Transport matrix as starting point for
  trade-matrix
• row and column sums from regional and national
  make use matrices

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Interregional Trade

• Implementation in modelling framework
• Ongoing work without definitive solution
• Status q uo
• Changes in regional flows based on relative
  prices
• Similar to modelling of imports
• Armington (CES) functions
• Ensure consistency within model framework
• New approaches arising from WIOD-environment ?!
• Issue endogenous arrival of sectors in regions
  where they had no previous representation
• Of minor concern in 9-province-model
• But of major concern in model of 99 districts

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Example Export boom in Vienna

• Increase in Viennese (900) exports of electrical
  equipment (CPA31)

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Example Price shock in Eisenstadt

• All output prices -5 in Eisenstadt (101)

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Interregional Trade

• Future work
• Alternative specifications/modelling approaches
• Gravity specification
• Exploratory co-operation with TU institute link
  of ETMOS with systems dynamics model of traffic
  flows
• Test/implementation of New Economic Geography
  aspects
• Separate treatment of trade in intermediates and
  consumption goods

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Family of regional models Appraisal and
Applications

• Regional data and quality
• National full information from National Accounts
• Province disaggregation (to a sizable extent)
  based on primary statistics
• District breakdown based on employment more
  information on CP and CG
• Econometrics and estimation
• National all coefficients econometrically
  derived from appropriate equations
• Province some coefficients based on provincial
  data some (majority?) derived from national
  elasticities with calibration to provincial data
• District all equations calibrated, based on
  provincial elasiticities
• Applications
• National base run (projections or forcasts),
  simulation runs
• Provincial limited forecasting abilities (in
  conjunction with national model) mainly
  simulation applications
• District VERY limited forecasting ability
  simulation applications (transport and trade
  location of sectors?)

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Econometric Modelling Philosophy

• Philosophy of a dynamic EIO model an alternative
  to static CGE models
• Dynamic macro-modelling (DSGE) optimising agents
  with numerous institutional frictions durables,
  liquidity constraints, technology lock-in,
  adjustment costs for investment
• Keynesian closure with explicit modelling of
  labour markets matching frictions, limited
  mobility and institutions (wage bargaining)
• Calibration based on econometric estimation with
  panel data sets (EU 27)
• Trade modelling beyond the Armington assumption

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Modelling Block Consumption

• Private Consumption intertemporal optimisation
• Chah, et.al. (1995) household maximes the
  expected value E0 of utility U in t 0, chosing
  levels of K (durables), C (nondurables) with
  given financial wealth A
• - j measures the part of durables that can be
  financed and lies between 0 and 1 (close to
  unity)
• Lagrangean function of the maximization problem
  first order conditions ?
• Relationship marginal utility of C(UC)/marginal
  utility of K (UK) in t
• Relationship Uc(t1) - Uc(t) / UC(t) - UK(t)

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Modelling Block Consumption

• Private Consumption intertemporal optimisation
• Chah, et.al. (1995) solution yields explicit
  equation for C that can be estimated
  econometrically
• Long-run (cointegrating) equation with error term
  Z
• Short-run equation with interest rate rt and
  random shock h.
• Private Consumption stock of K (durables)
• Stock adjustment (household level) between bounds
  s and S (Eberly, 1994 and Caballero, 1993)
• Approximated by stock adjustment with aggregate
  data

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Modelling Block Production

• Cost function and factor demand with fixed K
  dynamic duality
• Cost functions with variable inputs xv and quasi
  fixed inputs xk Shephards lemma (demand for xv)
  and envelope condition (shadow price of xk),
  survey article by Galeotii (1996)
• With or without explicit adjustment costs for xk
• Adjustment of actual xk to optimal xk in the
  spirit of Jorgensons flexible accelerator model
• Pindyck and Rotemberg (1983) Translog cost
  function with 2 quasi fixed inputs, L and K, and
  explicit adjustment costs ? estimation of Euler
  equations
• L, E, Mm, Md cost function with quasi fixed K and
  without explicit adjustment costs and including
  technical change
• Factor demand with autonomous (bias), embodied
  and induced (Jin and Jorgenson,2008) technical
  change
• (Implicit) investment demand as adjustment
  towards xk with expectation formation mechanism
• Mm is the link to trade modelling

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Conclusions and Future Research

• Trade matrix as a general consistent framework of
  modelling.
• Consistency between (i) Trade and IO/National
  Accounts Data (no problem in WIOD), (ii) Trade
  and Transport Data (monetary and physical)
• Econometric estimation at an adequate regional
  level with recent ? calibration (combining EIO
  and CGE philosophies)
• Dynamic New Keynesian modelling in consumption
  and production intertemporal optimisation with
  frictions, institutions, etc. (durable goods,
  liquidity constraints, adjustment costs for
  factor adjustment)
• Trade modelling beyond the Armington assumption
• Differentiating final (consumption) imports and
  intermediate imports
• Testing economic geography assumptions
  (increasing returns) vs. Importance of transport
  costs
• Testing new new trade theory (?)