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An Econometric Approach to General Equilibrium Modeling

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  • Jorgenson, Dale W.
  • Jin, Hui
  • Slesnick, Daniel T.
  • Wilcoxen, Peter J.

Abstract

The first objective of this chapter is to present a new approach to econometric modeling of producer behavior. Our key contribution is to represent the rate and biases of technical change by unobservable or latent variables. We also divide the rate of technical change between components that are induced by changes in prices and those that are autonomous and not affected by prices. In our dataset, production is disaggregated into 35 separate commodities produced by one or more of the 35 industries making up the US economy. Our second objective is to present a new econometric model of aggregate consumer behavior. The model allocates full wealth among time periods for households distinguished by demographic characteristics, and determines the within-period demands for leisure, consumer goods and services. An important feature of our approach is the development of a closed-form representation of aggregate demand and labor supply that accounts for the heterogeneity in household behavior that is observed in micro-level data. Our model of producer behavior is the supply side of general equilibrium models of the US. The aggregate demand functions are important components of the demand side. These general equilibrium models are used to analyze the consequences of a broad spectrum of public policies. These applications are discussed in more detail in Chapter 8 of this Handbook. The third objective of the chapter is to demonstrate an important benefit of the econometric approach to parameterization. The parameter covariances obtained in the course of estimation can be used to construct confidence intervals for endogenous variables in general equilibrium models. Confidence intervals characterize the precision of modeling results more rigorously and systematically than traditional sensitivity analysis.

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Bibliographic Info

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This chapter was published in:

  • Peter B. Dixon & Dale Jorgenson (ed.), 2012. "Handbook of Computable General Equilibrium Modeling," Handbook of Computable General Equilibrium Modeling, Elsevier, edition 1, volume 1, number 1.
    This item is provided by Elsevier in its series Handbook of Computable General Equilibrium Modeling with number v:1:y:2013:i:c:p:1133-1212.

    Handle: RePEc:eee:hacchp:v:1:y:2013:i:c:p:1133-1212

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    Web page: http://store.elsevier.com/Handbook-of-Computable-General-Equilibrium-Modeling/isbn-9780444536341/

    Related research

    Keywords: Rate and bias of technical change; latent variables; Kalman filter; aggregate demand; labor supply; confidence intervals; outcome variables;

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    References

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    1. Attanasio, Orazio P, et al, 1999. "Humps and Bumps in Lifetime Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 22-35, January.
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    3. Binswanger, Hans P., 1974. "A Microeconomic Approach To Induced Innovation," Staff Papers 14152, University of Minnesota, Department of Applied Economics.
    4. Slesnick,Daniel T., 2001. "Consumption and Social Welfare," Cambridge Books, Cambridge University Press, number 9780521497206, October.
    5. Jorgenson, Dale W. & Slesnick, Daniel T., 2008. "Consumption and labor supply," Journal of Econometrics, Elsevier, vol. 147(2), pages 326-335, December.
    6. Timmer,Marcel P. & Inklaar,Robert & O'Mahony,Mary & Ark,Bart van, 2010. "Economic Growth in Europe," Cambridge Books, Cambridge University Press, number 9780521198875, October.
    7. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-97, June.
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    9. Kim, Chang-Jin, 2006. "Time-varying parameter models with endogenous regressors," Economics Letters, Elsevier, vol. 91(1), pages 21-26, April.
    10. Browning, Martin & Hansen, Lars Peter & Heckman, James J., 1999. "Micro data and general equilibrium models," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 8, pages 543-633 Elsevier.
    11. Blundell, Richard & Browning, Martin & Meghir, Costas, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 57-80, January.
    12. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588.
    13. Binswanger, Hans P., 1973. "The Measurement Of Technical Change Biases With Many Factors Of Production," Staff Papers 14205, University of Minnesota, Department of Applied Economics.
    14. Barnett, William A. & Serletis, Apostolos, 2008. "Consumer preferences and demand systems," Journal of Econometrics, Elsevier, vol. 147(2), pages 210-224, December.
    15. Daron Acemoglu, 2002. "Directed Technical Change," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 781-809.
    16. Daron Acemoglu, 2000. "Technical Change, Inequality, and the Labor Market," NBER Working Papers 7800, National Bureau of Economic Research, Inc.
    17. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
    18. Jorgenson, Dale W., 2005. "Accounting for Growth in the Information Age," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 10, pages 743-815 Elsevier.
    19. Kim, Chang-Jin & Nelson, Charles R., 2006. "Estimation of a forward-looking monetary policy rule: A time-varying parameter model using ex post data," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1949-1966, November.
    20. Dale W. Jorgenson & Mun S. Ho & Kevin J. Stiroh, 2005. "Productivity, Volume 3: Information Technology and the American Growth Resurgence," MIT Press Books, The MIT Press, edition 1, volume 3, number 0262101114.
    21. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2003. "Chapter 11 Technological change and the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 11, pages 461-516 Elsevier.
    22. Dale W. Jorgenson, 1998. "Growth, Volume 2: Energy, the Environment, and Economic Growth," MIT Press Books, The MIT Press, edition 1, volume 2, number 0262100746.
    23. A. Ronald Gallant & Gene H. Golub, 1982. "Imposing Curvature Restrictions on Flexible Functional Forms," Discussion Papers 538, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    26. Slesnick, Daniel T., 2002. "Prices and Regional Variation in Welfare," Journal of Urban Economics, Elsevier, vol. 51(3), pages 446-468, May.
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