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Optimality Between Time of Estimation and Reliability of Model Results in the Monte Carlo Method: A Case for a CGE Model

Author

Listed:
  • Tetsuji Tanaka

    (Setsunan University)

  • Jin Guo

    (Setsunan University)

  • Naruto Hiyama

    (Funai Corporation, Inc)

  • Baris Karapinar

    (Boğaziçi University)

Abstract

Computable general equilibrium (CGE) is one of the most frequently utilised macroeconomic models in policy decision-making processes. Economists introduced a stochastic concept to deterministic CGE models using the Monte Carlo (MC) method to identify the effects of climate change or extreme weather patterns that have exacerbated global food insecurity. However, a weakness of the MC method is its time-consuming process to approximate probability distributions with a considerable number of randomised draws. Modellers have unavoidably to face a trade-off between the duration of computation and the accuracy of a model’s results. This paper explores an optimal balance point between the two elements in CGE analysis. Assuming that 2000 repetitive simulations create adequately precise simulation outcomes, we compare model results from 100, 500 and 1000 iterations with those from 2000 repetitive calculations. We found that 1000-time iterations indicate highly credible outcomes, 500-time simulations can function well; however, with moderate accuracy, whereas 100-time calculations are apparently insufficient to obtain reliable outcomes.

Suggested Citation

  • Tetsuji Tanaka & Jin Guo & Naruto Hiyama & Baris Karapinar, 2022. "Optimality Between Time of Estimation and Reliability of Model Results in the Monte Carlo Method: A Case for a CGE Model," Computational Economics, Springer;Society for Computational Economics, vol. 59(1), pages 151-176, January.
    • Handle: RePEc:kap:compec:v:59:y:2022:i:1:d:10.1007_s10614-020-10080-8
    DOI: 10.1007/s10614-020-10080-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Monte Carlo method; Computable general equilibrium model; Agricultural productivity; Stochastic model;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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