| By nearly 40 years'development, Computable General Equilibrium(CGE) model, has become a very normative model. CGE models can simulate the market mechanisms and non-market activities, the calculated results can well explain the reasons for the phenomenon happened, and more accurately predict future economic trends. In addition, CGE model which integrates imperfect competition action,the volume and price, and comprehensive government interventions, has great advantages on constructing the model. At present, China's economic growth is in the period of valid economic policy and active policy intervention, Using the appropriate model to make a choose in the different policy projects have a great effect on reducing the cost of policy evaluation and increasing the efficiency. In comparison to the macroeconomic model, the input-output model, the CGE models is more suitable for simulation impacts of the policy changes and external shocks. It has become a powerful tool to analyze the policy and been widely used, It also has become an official branch of the application economics. The paper expatiates on CGE model configuration,closure rules,basic data,parameter estimation,calibration methods, and sensitivity testing of model simulation results, and applies aforementioned theories to research on exchange rate policy in China. This article is divided into eight chapters, the main content and structure of each chapter are as follows:Preface Chapter. This chapter proposed the reasons,advantages, and significance of developing CGE models, and outlined the structure and innovations of the paper.Chapter II: The Literature Review of CGE. The chapter systematically expounded the research literatures of the principle of CGE modeling and parameter estimation methods. The reseaches on CGE model refer to the macro-public policy, micro-industrial policy, international trade policy in developed and developing countries, as well as fields like public health, environmental health, regional economic, tourism, transportation, education and war. With the improvement in modeling techniques, it expands and improves gradually on the application areas and researching depth. A typical set of CGE model usually includes the production equation, the demand equation, import and export equations, as well as a balanced equation. Generally the production function uses nested Leontief/CES or Leontief/C-D function, may also have recourse to Translog equation; demand function usually uses LES, ELES, C-D, CES or CDE function. Trade uses Armington assumption, while the domestic output will be divided into exports and domestic sales of goods, it is usually assumed that there is a relationship of CET between them. CGE model usually requires exogenous elasticity values given, including: the substitution elasticity between the production factors, trade function flexibility, the elasticity of the residents demand function, all of these parameters are given exogenously by econometric methods or results of other literatures.Chapter III: CGE module settings. CGE model is built on the idea of Walras non-linear economic system, combined with input-output models, linear programming model and the macro-economic model. CGE model is a group of supply and demand equations describing the economic system, in order to illustrate relations among the supply,demand and market, the CGE model that we made includes three groups of equations which respectively express the supply side, demand side and supply-demand relationship.On the supply side, the model mainly describes producer actions of the merchandise and elements, as well as the optimum conditions, including the production equation and the constraint equation of the producers, the supply equation of production factors and its optimization equation and so on. The production equation of the model describes the courses that the producers use a variety of production factors and production resources to produce goods in the different technical conditions. Production functions which the model often use include: C-D production function, CES, CET production function, Leontief production function, two-layer or multi-layer nested production function, and so on. In order to describe the behavior that producer pursuits profit maximization, CGE model generally includes optimized first-order equation, that make remunerations of all elements be equal to marginal productivity.On the demand side, the model focuses on describing the consumer behavior and its optimum conditions, including consumer demand equations, constraint equations, demand equations of production factors. The demand function expressions got by using consumer utility maximization theory include the types of C-D, CES, LES and EELS.The relation of supply and demand is composed of a series of condition on market clearing, including product market equilibrium, that means the total supply of all products should be equal to their total demand in the domestic market; factor market clearing, that means the total supply of the elements equals to the total demand, and other equilibrium relationship in economic system, which includes governmental and residential equilibriums of income and expenditure, international revenue and expenditure equilibrium, the equilibrium of investment and savings.The three equations all comprise the related optimized equation. It means that even though CGE model has an overall objective function, but the optimization process are scattered in various departments.If in open economy, we must add the trade-related variables in the production function and demand function, at this point, we also should consider the balance between international income and expenditure in the equilibrium conditions of the model. When we build the practical CGE model, we should select economic agents according to the specific question, and use suitable theory to describe the economic activities regularity of these agents, CGE model equations should generally contain : production equations, consumer equations, supply equation of production factors (labor, capital, etc.), demand equation of production factors, domestic demand equation, income and expenditure equations of residents and the government, the price equations in the domestic market and the international market, import,export and optimization equation, international trade balance equations, domestic market balance equation, commodities balance equation and elements balance equation. CGE model which researches on the multinational relationship would like to add a group of equations that state currencies,production factor flow,finance,trade relations. among the countries.Chapter IV: Closure rules in CGE model. After constructing CGE model, in order to ensure the uniqueness of solution, we have to closure the model. Closure means that it is necessary to identify and assign the exogenous variables when solving a model. Different selections of exogenous variables and closing model reflect different assumptions about the factor market and macro-behavior. The macro closure rules mainly relate to Neoclassical closure and Johanson closure, micro-closure closure rules refer mainly to Keynes closure. Neoclassical closure rules set the investment as endogenous variables, in a closed economy, the equilibrium of investment and savings is cleared by interest rate adjustment mechanism outside the model, in an open economy, through the real exchange rate adjustment so as to achieve the equilibrium of savings and investment; at this time we can also make the level of government spending and the savings rate of residents after-tax income exogenous, and then the savings decides the investment, achieving a balanced solution of the model. In Johanson closures, the savings is decided by the investment, in a closed economy, the equilibrium of the savings and investment can be adjusted by the tax rate, in an open economy their equilibrium can be adjusted by exchange rate. The macro closures mentioned above assume that commodity markets and labor market is equilibrium, but the wage and price is rigid in short-term, unemployment existing in the labor market, Keynes closure is brought forward on the base of the assumption that the labor market imbalance, in the circumstances, the wage rate or labor supply is setted as a equilibrium variables, and the model eventually achieves a equilibrium solution.Chapter V: The basic data of CGE model. It was necessary to give the initial value to the exogenous variables and all parameters after realising the model has solution. SAM can meet data requirements in the CGE model, it can provide a data set which meets the comprehensiveness, consistency and equilibrium for a model. SAM is a corresponding balanced spreadsheet form, which number of rows and columns is the same, in its matrix units, each transaction only have one record.SAM can be divided into macro-SAM and micro-SAM. A standard macro SAM includes: activities account reflecting the input and output of domestic manufacturers, as well as the supply and demand in domestic market; factors account reflecting factor input and factor income distribution; the institutes account reflecting the revenue and expenditure of the households,enterprises and government; capital accounts reflecting the fixed capital formation and savings sources; the ROW accounts reflecting the connection with external economic; the total account reflecting income and expenditure. In order to make the SAM contain more information in the economic structure, we need to convert the macro SAM to the micro one, However, when we put these data from different sources into a SAM framework, it will result to imbalance, so we need to adjust the SAM in certain constraint conditions, in order to meet the consistency requirements. This chapter mainly introduced the RAS and CE approaches to leveling the initial SAM. RAS approach means that under the circumstance of known sum of rows and columns in a new matrix, multiplying initial matrix left and right separately by row multiplier and column multiplier, generating a new balanced matrix with the same dimensions; CE approach means to find a new balanced matrix which is as contiguous to the initial SAM matrix as possible by minimizing the cross-entropy under the circumstance of all constraints conditions are satisfied. CE approach includes the deterministic approach and stochastic approach, the deterministic approach refers to updating the early SAM by new information, and the stochastic approach refers to adjusting the unbalanced SAM to balanced one by error measurement. According to Chinese IO table in 2005, the chapter used the top-down method to construct China macro-SAM in 2005, and used CE methods to balance it.Chapter VI:Parameter estimation and model calibration of CGE model. After obtaining basic data of the model, it is necessary to seek solutions to the elasticity parameters and share parameters of the model. Thereinto, the elasticity parameters are decided exogenously by econometric methods or the research results of other literature. The chapter introduced methods for solving elasticity parameters which are usually used in production function, demand functions and trade function.The methods for estimating elasticity of production function mainly contain classical statistical methods, Bayesian method and GME method.This chapter solved the parameters of constant-returns-to-scale CES production function in manufacturing, and it is concluded as follows: for selected manufacturing industries, in the data constraints, there are parameter values incompatible by the classical statistical methods and GME method. The estimated results of the parameters by Bayesian method revealed that the posterior kernel density of each parameter are asymptotic normality, convergence diagnostics also shows that the parameters tend to convergence and stability.The trade elasticity can be directly estimated after knowing import and export volume,sales volume in domestic market and import and export prices of merchandise, it may also be decided exogenously or by GME methodThe demand function in CGE model mainly expressed by LES or EELS, when we convert the two types of functions to the form of econometric model for parameter estimation, it is necessary to consider the relativity of errors, if errors are irrelevant, we can use OLS, comparatively we use SUR to estimate parameters.The share parameters of the CGE model are need to get by calibration method on the base of SAM in the base period, the first step of calibration is to separate price from quantity in transaction data in the base period. In order to obtain two types of independent information on the equilibrium price and quantity, we must decompose them by the unit conversion. Equilibrium price vector is generally set to be one, in this way, data from the SAM table in the base period expresses both nominal value and actual value. If the Cobb-Douglas function is used, we may only use equilibrium data in the base period to calibrate the unknown parameters, while elasticity parameters of the CES function must be exogenous.Chapter VII: Sensitivity analysis on the simulated results of the CGE model. CGE model contains a large amount of nonlinear equations, most of the parameters in the model are estimated by calibration method, that can't measure the reliability of parameters. In addition, in the preparation process in the SAM, because of missing data, inconsistent data sources, combined with statistical error, when we put these data from different sources into a SAM framework, it will result to imbalance,Testing the correctness of the modeling and calculation can be achieved by following steps: testing whether the benchmark data of the model is in equilibrium; checking out the relationship between the benchmark data and benchmark solutions; inspecting whether all equations in the CGE model possess the price homogeneous characteristic; testing the impact of small changes in parameters on the optimal solution. Thereinto, sensitivity analysis is the most important. Sensitivity analysis studies steadiness of interested variables for simulation results under the circumstances that freedom parameters departure from value point. Parameters not only have an impact on the optimal solution and the corresponding Lagrange coefficients, but also affect optimal target value.Chapter VIII: China CGE model and its application in exchange rate policy evaluation. The chapter set up a CGE model which is used to analysis Chinese economy. This model used the static simulation to analyze the impacts on import and export,domestic market supply and price of all manufacturing industries, when exchange rate changes 17.39%,19.85% and 22.81%. It is concluded that: On the import side, according to exchange rate pass-through effect, RMB appreciation makes the currency price of imported commodities except metal industries fall and stimulate imports; with the range of appreciation increased, the growth rate of imports also increased. On the export side, with RMB appreciation, exports for all industries show downtrends, they are non-metal industry, coking, gas and petroleum refining industry, chemical industry, metal products industry, foodstuff industry, textile industry, machinery and equipment industry in turn. Exchange rate pass-through effect also depends on the import substitution elasticity and export conversion flexibility elasticity: the domestic commodity prices and imported merchandise quantity of foodstuff industry, non-metal industry, coking, gas and petroleum refining industry, chemical industry, have positive correlations with the import substitution elasticity; the domestic prices of machinery and equipment industry, metal industry, non-metal industry, chemical industry, coking, gas and petroleum refining industry has a negative correlation with export conversion flexibility; and for selected manufacturing, the order of the export decrease rate accords with the theoretical results that with the same import substitution elasticity, the larger the export conversion flexibility, the more the exports decrease. In this paper, we also tested the sensitivity for simulated results of the model, the test results show that changes of the trade elasticity have no significant impact on the calculated results, it is determined that results of model analysis is credible.The chapter also combined the structure of our country's export trade and national trade policies, explains the reality that RMB appreciation has not led to the export decrease. On the base of comparative static simulation mentioned above, we set up the dynamic CGE model and analyze the influence of exchange rate changing on all manufacturing industries in a short term. It is concluded that: in the course of short-term exchange rate adjustment, the elasticity of the inspection indexes in metal industry with exchange rate fluctuations is the largest; for the machinery and equipment industry, imports and domestic supply, integrated product price and domestic supply price are all show uptrend, but the increase rate slows down gradually. Therefore, whether our government can adopt appreciation under certain international pressure depends on integrated judgement on the needs of domestic economic development, structural of import and export, as well as supply and demand relationship of commodities and currency in international markets.
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