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

endogenously (i.e., allow the curve to shift) – which implies the need to endogenise taste
(demand) or technology (supply) variables.
Within a system of ‘n’ equations, an examination of period-by-period equilibria
requires a careful and consistent selection of exogenous shocks. In the case of our ORANI
baseline and policy scenarios, taste change data on red/white meat taste changes based on
OECD (2008) forecast data measured in per capita consumption (kg per head).
Productivity shocks for crop, ruminants and non ruminants sectors are based on estimates
of total factor productivity change in Ludena el al. (2006), whilst those for the nonagricultural
sector employ shocks found in Jensen et al. (2003).
Given the small country assumption, it is assumed that the world price in import and
export demand functions are exogenous. Whilst year-on-year world price data at the level
of tariff line aggregation is not available for all agricultural and non agricultural sectors, we
can at very least control for changes in fossil fuel and biofuel world prices. For fossil fuels,
data from the United States Energy Information Administration (2010) is employed which
provides data on coal, oil and gas with additional projections up to 2035. This data
accounts for the crisis, especially in 2009, where crude energy prices dropped dramatically
owing to the contraction in the US economy. For a non-crisis baseline, historical data is
employed up to 2008, whilst from 2009, it is assumed that world prices rise 2% per annum
(as assumed in OECD projections).
For biofuels, OECD (2009, 2010) provides useful year on year world prices data with
forecasts for both non-crisis and economic crisis scenarios. The change in Spanish
biodiesel and bioethanol activity is captured employing these year-on-year shocks, whilst
further developments in these markets are endogenously determined via the chosen
elasticities in the energy substitution possibilities nest.
In addition, EU and non-EU inflation changes can be implemented via a new world
price variable indexed over bilateral route only. In this way, price shocks will impact
uniformly across all commodities in the import and export demand functions. Data for EU
and world inflation can be obtained from IMF (2008, 2010).
In ORANI-DYN, the total land endowments in Spain changes endogenously,
employing an econometrically estimated land supply function (see section 5.2). In the
labour markets (see section 7), the (sticky) real wage is calibrated to a wage elasticity
parameter with exogenous changes in employment. Moreover, different supply elasticity
functions characterise different degrees of labour rigidity (particularly pertinent for the
Spanish labour market) across different labour occupations (more highly skilled implies
lower supply elasticity). The total capital endowment is endogenous and adjusts in each
period ‘t’ (capital accumulation) to exogenous changes in net investment in period ‘t-1’.
In terms of agricultural product markets, subject to policy induced reductions in
intervention prices, negative shocks are imposed on non-EU sourced import prices and a
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