1 A Recursive Dynamic Computable General Equilibrium Model For ...

(TRANSFER(“spend”)), less social security payments and rents on publically owned
buildings (TRANSFER(“rev”)) and direct income taxes on salaries, estates etc
(V0HHTAX). Summing over these concepts gives the value €712,671 million. In the
standard ORANI-G model, the percentage change in aggregate household expenditure
(w3tot_h) is linked to changes in the value of Spanish GDP (w0gdpinc). In our modified
model, percentage changes in aggregate household expenditure and direct income taxes
(w0hhtax) are now proportionally linked to aggregate household disposable income
(w0hhinc) via the linear equations:
w3tot
_ h = f 3tot
+ w0hhinc
w0hhtax
= w0hhinc
+ finctax
where w0hhtax is used to update V0HHTAX, w0hhinc is employed to update V0HHINC
and f3tot and finctax are exogenous shifter variables. The latter can be employed to
manipulate (uniform) direct taxes rates, which also has feedback effects on the government
budget.
9. Closure and shocks in dynamic ORANI-DYN
As is typical in the CGE model approach, the number of variables (n) will exceed the
number of equations (m), which requires (n-m) exogenous variables. From a mathematical
perspective, the exogenous-endogenous split must ensure that the endogenous coefficient
matrix is invertible. It is, however, the realm of economics to which we must turn in order
to guide our choice of appropriate closure. This may be guided by specific considerations:
Firstly, how available are the data? Economics has relatively little to say about non
price determinants (i.e., taste, productivity). Consequently, such variables are typically
maintained as exogenous over time. If ‘acceptable’ proxy data are available, then exogenous
shocks may be applied within a baseline scenario (see later discussion).
Secondly, what is the maintained hypothesis for the macro economy. It may be that
the modeller wishes to focus on the short run impacts. In this case, a closure where real
wages are fixed (controlled by unions) under the ‘sticky wages’ hypothesis is more
appropriate. With a closure change, a long run labour market scenario could imply fully
flexible real wages (i.e., labour supply fixed and real wages fully flexible).
Thirdly, there is the issue of what the focus of the simulation is. For example, it may
be that the impact of milk quotas is of paramount importance – thus, the milk quota must
be exogenised, whilst rent should be allowed to adjust endogenously. Alternatively, if an
import quantity is exogenised, the corresponding price imported will need to be
endogenous (to capture, say an import quota). Likewise, with a price fixing closure
(exogenous price), the quantity should be allowed to adjust. If both price and quantity are
exogenised in a given market, we must allow the non own-price determinants to change
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