SIMULATION MODELS
st
1 Week
INTRODUCTION
Master économie Internationale et Développement
Université Paris Dauphine
Dr. Rafael de Arce
Professeur Univ. Autónoma de Madrid
http://www.uam.es/rafael.dearce
WHY DO POLICY-MAKERS NEED MODELS?
Reference paper: Piermartini, R. and Teh, R. (2005): “Demystifying Modelling Methods for
Trade Policy”. WTO Discussion Papers, num. 10. September, 2005.
• Economic models provide a theoretically
consistent, rigorous and quantitative way of
evaluating different policy analysis.
• Multiple options, multiple actors.
• A simulation of the model can confirm that
judgment and provide estimate of the likely gains
• Models can alert about effects in inter-related
issues
• But, what’s first? “The tail shouldn’t wag the dog”
Master économie Internationale et Développement, Université Paris Dauphine
WHY DO POLICY-MAKERS NEED MODELS?
WHY DO POLICY-MAKERS NEED MODELS?
EXPONENTIAL GROWTH
 Largeness and wideness Statistical collection
(“Big data and Macro/Micro data availability)
 Increase of Computational power
 Advances in theoretical analysis
Master économie Internationale et Développement, Université Paris Dauphine
Moore Law
“Sylicone chip procesor doubles its capacity in 18 months....”
STRENGTHS
 Reflects Inter-dependency of economic variables
 Computer based models allow us to track all of
these interactions
 Simulation of several scenarios is available
 Simulations are performed in a transparent
hypothesis frame
 They discipline thinking about how economies
actually work
Master économie Internationale et Développement, Université Paris Dauphine
LIMITATIONS
Aggregations can obscure important underlying
relationships
Data are not always “high quality”
All the quantitative models are subject to error
Responsiveness of supply and demand to price
changes are not necessarily accurate
Choices among scenarios and model
specification can imply very different results
Technical comprehension is only available for
experts
Master économie Internationale et Développement, Université Paris Dauphine
CHOICE THE MODEL
 COMPARATIVE STATIC AND DYNAMIC ANALYSIS
• Static: changes in policies and direct transmission to
endogenous variables of model
• Dynamic: final and intermediate process of change
 PARTIAL OR GENERAL EQUILIBRIUM ANALYSES
• “Ceteris Paribus” criteria
• Whole economy linkages
Master économie Internationale et Développement, Université Paris Dauphine
Whole economy linkages
Reference paper: Piermartini, R. and Teh, R. (2005): “Demystifying Modelling Methods for Trade Policy”. WTO
Discussion Papers, num. 10. September, 2005.
KIND OF THECNICAL STRATEGIES
FREQUENTLY USED IN INTERNATIONAL
SIMULATIONS
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Traditional Econometric Multiequational Models
Optimization Models
Gravity Models
Panel Data Models
Leontief Based Models (I-O Models)
Social Account Matrix Models
Master économie Internationale et Développement, Université Paris Dauphine
Exogenous  Endogenous Relationship
• Optimization:
– One target function
– Constraints to be accomplished
– Linear and non linear available linkages
– Sometimes, more than one solution (local
optimum)
Master économie Internationale et Développement, Université Paris Dauphine
Exogenous  Endogenous Relationship
• Gravity Models:
Gij 
Mi  mj
d ij2
Example: Gravity Panel Data Model used in Arce and Mahia (2008): “ DETERMINANTS OF
BILATERAL IMMIGRATION FLOWS BETWEEN THE EUROPEAN UNION AND SOME
MEDITERRANEAN PARTNER COUNTRIES: ALGERIA, EGYPT, MOROCCO, TUNISIA AND
TURKEY”. FEMISE 2008:
log( INMIG it )   i   2 log( GPULLit / GPUSHit )   3 log( EMPHOS it )   4 log( POTMIG it ) 
 5 log( GINHOS it / GINORI it )   6 log( DISTAN i )   7 log( INMIG it 1 )
  8 LANGi  U it
Master économie Internationale et Développement, Université Paris Dauphine
Exogenous  Endogenous Relationship:
Leontief Based Models (I-O Models) and
Computable General Equilibrium (CGM):
– Actors
–
–
–
–
–
–
–
–
Activities
Commodities
Factors
Enterprises
Households
Government
Capital Account
Rest of the World
– Behavioral
parameters
– Elasticity of
producers and
consumers to
price changes
– Value Added
– Armington
– Demand/income
Master économie Internationale et Développement, Université Paris Dauphine
SAM Structure
“The most important thing between the
screen and the keyboard is the person
who is in the middle of them.”