Geographic Macro and Regional (GMR) Model for EU Policy Impact Analysis of Intangible Assets and Growth Attila Varga P

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Geographic Macro and Regional (GMR) Model for EU
Policy Impact Analysis of Intangible Assets and
GrowthAttila VargaPéter JárosiTamás
Sebestyén PTE KTK KRTI
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Development policy instruments

• Knowledge-based development policy
• Policy instruments
• Promoting firms technological potential
  (start-up and investment supports, tax credits,
  low interest rate loans or venture capital)
• Local technological environment support (RD
  promotion universities and private firms, human
  capital improvement, support of public-private
  interactions in innovation, financing physical
  infrastructure building)

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• GMR Geographic Macro and Regional Modelling

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Why should geography be incorporated into
development policy impact modeling?

• Geography and policy effectiveness
• 1. Interventions happen at a certain point in
  space and the impacts appear there / spill over
  to proximate locations to a considerable extent.
• 2. The initial impacts could significantly be
  amplified/reduced by short run agglomeration
  effects.
• 3. Cumulative long run process resulting from
  migration of K and L
• - further amplification/reduction of the
  initial impacts in the region
• - the spatial structure of the economy (K, L,
  Y, w) might eventually change in a significant
  manner.
• 4. Different spatial patterns of interventions
  might result in significantly different growth
  and convergence/divergence patterns.

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Why regional
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Why macro?
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GMR-Eurozone

• The particular model developed for the Eurozone
  NUTS 2 regions includes
• a KPF model (to model 1 and 2)
• an SCGE model (for 3)
• a macro DSGE model (for 4)

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Introduction

• Antecedents
• Empirical modeling framework (Varga 2006)
• EcoRet model (Schalk, Varga 2004, Varga, Schalk
  2004)
• GMR-Hungary model (Varga, Schalk, Koike, Járosi,
  Tavasszy 2008)
• Dynamic KPF model for EU regions (Varga,
  Pontikakis, Chorafakis, 2009)

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Outline

• Model structure
• The KPF model
• The SCGE model
• Dynamism and macro effects macro DSGE model
  (QUEST III)
• Policy simulations

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The role of the KPF model

• To generate initial TFP changes as a result of
  technology policy interventions
• NOT for forecasting but for impact analysis

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Equations in the TFP block
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The TFP equation
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Require the integration of TFP with the SCGE and
MACRO models

• BUT
• How strong these processes are?
• What are the economic impacts on the regions?
• What are the macro (EU level) economic impacts?

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The role of the SCGE model

• To generate dynamic TFP changes that incorporate
  the effects of agglomeration externalities on
  labor-capital migration
• Agglomeration effects depend on
• - centripetal forces local knowledge (TFP)
• - centrifugal forces transport cost, congestion
• To calculate the spatial distribution of L, I, Y,
  w for the period of simulation

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The SCGE model

• C-D production function, cost minimization,
  utility maximization, interregional trade,
  migration
• Equilibrium
• - short run (regional equilibrium)
• - long run (interregional equilibrium)

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Main characteristics of the SCGE model

• NOT for historical forecasting
• The aim to study the spatial effects of shocks
  (technology policy intervention)
• Without interventions it represents full spatial
  equilibrium - regional and interregional (no
  migration)
• Shock interrupts the state of equilibrium, the
  model describes the gradual process towards full
  spatial equilibrium

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The role of the MACRO model

• Regional technology policy impacts depend to a
  large extent on macro level variables
  (fiscal/monetary policy shocks, exchange rates,
  international trade etc.)
• Dynamising the (static) SCGE model

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The MACRO model

• The QUEST III Dynamic stochastic general
  equilibrium (DSGE) model for the EURO area
• A-spatial model
• Macro effects of exogenous TFP shocks
• Baseline TFP growth without interventions
• Policy simulations describe the effects of TFP
  changes on macro variables

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Regional and national level short run and long
run effects of TFP changes induced by regional
technology policy interventions

• 1. Intervention in any region changes regional
  TFP level
• 2. Short run effect
• - price of the good decreases
• - decreasing demand for both L and K
  (substitution effect - SE)
• - increasing regional and interregional demand
  for the good increases demand for L and K
  (output effect - OE)
• - if OEgtSE increased regional demand increases
  wages and utility levels of consumers in the
  region
• 3. Long run effects increasing utility levels
  induces labor migration into the region (until
  congestion does not prevail) followed by capital
  migration
• - resulting in a further increase in TFP
• - and finally a changed spatial economic
  structure
• 4. Macroeconomic variables reflect the long run
  equilibrium TFP level resulting from dynamic
  agglomeration effects

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Data, software environment

• The model is build for the NUTS 2 regions of the
  EURO zone
• Regional KPF model estimated in SpaceStat
• The complex model is programmed and run in MATLAB
• Easy to run/make simulation changes with an Excel
  interface
• The regional model is large considering that
  equilibriums have to be found for 144
  interconnected (interregional trade and
  migration) regions
• A simulation with 20 periods needs the computer
  time of about 20 minutes

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Regional RD policy impact assessment The EU FP6
program

• EURO zone 144 NUTS 2 regions (QUEST constraint)
• Interventions 2003-2007

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Policy implications
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Policy implications (cont.)