This action might not be possible to undo. Are you sure you want to continue?
Presented at the Advising Group Meeting of the Information and Indicators program for Disaster Risk Management Project January 13, 2004, Washington, D.C.
l l l
l l l l l
Introduction Modelling work on macroeconomic effects Assessing the effects of external shocks and unscheduled events Financial programming The World Bank RMSM model The merged model and RMSM-X Three-Gap models The International Institute for Applied System Analysis (IIASA) model Input-output analysis and the SIM model
Introduction The body of research on the modelling of macroeconomic effects of disasters is very limited The existing models offer the generalised framework, aim to provide the empirical modelling and lack either theoretical development or the analysis of macroeconomic effects. Thus, more empirical evidence and/or case studies on actual disasters are required to test them in terms of its validity and predictability The dynamics of recovery and reconstruction impacts need to be considered Is it possible to construct a unique theoretical framework for disasters as a phenomenon? 3
sector § Indices of industrial output are used to measure business cycle fluctuations § Manufacturing sector accounts for a significant fraction of total GDP 4 .Key characteristics § Developing countries tend to be prone to sudden crises and changes in macroeconomic aggregates. Macroeconomic shocks and their propagation mechanisms are likely to differ in developing countries § Most countries in LAC could be characterized as middle-income countries § Urbanization rates and the proportions of agricultural output as a percentage of total GDP indicate that agriculture is an important. but not dominant.
5 . in percent of GDP) Agriculture Africa Benin Burundi Cameroon Côte d'Ivoire Ethiopia Ghana Kenya Malawi Nigeria Tanzania Zambia Zimbabwe 0 20 40 60 80 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 Industry Asia Bangladesh India Indonesia Korea Malaysia Nepal Pakistan Philippines Sri Lanka Thailand 0 20 Services 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 100 40 60 80 100 Source: World Bank.Figure 1a Structure of Output (Value added.
6 . in percent of GDP) Agriculture Industry Services Latin America Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador Jamaica Mexico Peru Uruguay Venezuela 0 20 40 60 80 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 Middle East and North Africa Algeria Egypt Jordan Mauritania Morocco Oman Syria Tunisia Turkey Yemen 0 20 40 60 80 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 1980 1995 100 100 Source: World Bank.Figure 1b Structure of Output (Value added.
Modelling work on macroeconomic effects 7 .
1999) I n p u t-o u t p u t Sequential Interindustry Model (SIM) (O k u y a m a . 1996) Growth model (Tol/Leek. 2 0 0 0 ) Key features S hort/medium L o ng term No specific countries Main results Y reduction. growth model ( A l b a l a -B e r t r a n d . distribution effects mainly Effects of economy capital loss on S hort/medium L ong term D eveloping countries Short/medium Japan Long term No specific countries Dynamic formulation Japan Mitigation investment diverts C a n d I N V affecting current and future output Effects of recovery and reconstruction over time 8 . I N V s h o u l d b e oriented to productive sectors Long term aggregate effects not significant.Models on natural disasters Model Aggregate demand/supply Growth model (Dacy -Kunreuther. foreign aid and altruistic behaviour change results Marginal productivity differs s e c t o r a ll y . 1969) I n p u t-o u t p u t . P increase. 1993) Interregional i n p u toutput (Okuyama. S -I.
Assessing the effects of external shocks and unscheduled events 9 .
l Terms of trade. 10 . expressed as a percentage of output. changes in global demand. Neary. è Changes in global demand: deviation of growth of world export volumes from estimated trend multiplied by initial export volume.McCarthy. and Zanalda (1994) Step 1: estimate impact of three components on BOP. è Terms of trade shock: measured as the market value of the net import effect. è Interest rate effect: change in world interest rates multiplied by stock of interest rate sensitive external debt. interest rate effect.
è Level of demand: adjustment in imports from reduction in aggregate demand. 11 . Step 3: calculate additional net external financing as the difference between the effect of all shocks and the economy’s responses. difference between expected import volumes using historical import elasticity of GDP using trend growth versus actual GDP growth. è Expenditure-switching measures: captured by changes in export performance and the degree of import intensity. Neary.McCarthy. and Zanalda (1994) l l Step 2: estimate economy’s response to shocks.
Financial Programming l l The Polak Model An Extended Framework 12 .
The Polak Model 13 .
0 < α < 1. (5) ∆F: capital inflows ∆Md = v-1∆Y. Four Equations: ∆Ms = ∆L + ∆R (4) ∆Ms: money supply.l l Considers small open economy. ∆R : official foreign exchange reserves ∆R = X . v > 0. ∆L: domestic credit.αY + ∆F. (6) 14 . with fixed exchange rate.
15 . (6).v: income velocity of money ∆Ms = ∆Md (7) Polak focus: l Determine effects of changes in domestic credit on foreign exchange reserves. and (7). ∆R = v-1∆Y . l Reserves will only increase when nominal money demanded exceeds change in domestic credit. l Using (4).∆L .
α. ∆F. (change in domestic credit) Parameters: v. (income velocity of money. J = αY (change in nominal money balances. (exports.Polak model structure: Target Variables: ∆R (change in official foreign reserve) Endogenous Variables: ∆M. ∆Y. imports) Exogenous Variables: X. marginal propensity to import) 16 . change in net capital flows) Policy Instruments: ∆L. change in nominal output.
l Assumes a stable money demand function.Limitations of the Polak Model: l Assumes that changes in domestic credit have no effect on domestic money demand. in many developing countries the bank credit-supply side link is a critical feature of the economy. 17 . in practice money demand tends to be unstable as a result of volatile inflation expectations.
An Extended Framework 18 .
and y: real output.Khan. and Montiel (1990) l Distinguishes between real and nominal output and the sources of credit growth. Y = Py Y: nominal income. Extended framework equations: l Consider single good economy where. Haque. P: overall price index. ∆Y = ∆Py-1 + P-1∆y 19 .
20 .δ)(∆E + ∆P*). ∆Lp : private sector credit ∆Lg : government credit ∆Lp : f(demand for working capital). proportional to changes in nominal output: ∆Lp = θ∆Y. ∆PD and exchange rate adjusted foreign prices changes by. 0 <δ <1 l Domestic credit ∆L = ∆Lp + ∆Lg.l Price changes: function of domestic price changes. ∆P = δ∆ PD + (1 .
with ∆R = E∆R* ∆R = X . E : nominal exchange rate 21 .J + ∆F X: Exports (exogenous).l Money supply identity: ∆M = ∆L + ∆R. J = EQJ. QJ : import volume. J: Imports in nominal terms.
related to the change in output and the relative price of foreign goods.(∆E + ∆P*)] η > 0: import elasticity to relative price changes. ∆QJ = α∆y + η[∆PD .l Changes in import volume.∆P*)] (16) 22 . l Nominal value of imports: J = J-1 + (QJ-1 .ηE-1)∆E + E-1[α∆y + η(∆PD .
improve the trade balance and increase official reserves. money market assumed to be in flow equilibrium. l l 23 . Government Budget Constraint: G . Income velocity: constant as in Polak model. budget deficit is financed by foreign borrowing or changes in central bank credit. a devaluation in the nominal exchange rate (∆E > 0) will lower the nominal value of imports.l With relatively small QJ-1.T = ∆L + ∆Fg.
Structure of Extended Framework: Target variables: ∆R. P -1. X. G-T Exogenous variables: ∆y. ∆F = ∆Fp + ∆Fg Policy instruments: ∆Lg. θ. ∆P*. ∆PD Endogenous variables: ∆Y. ∆E Predetermined: y -1. ∆M. ∆Lp. δ. α. 24 . ∆J. QJ-1 Parameters: v. ∆P. η.
p. ~ ∆P D 25 . and Haque (1990. 161).Figure 2 The Extended Financial Programming Model ∆R B ~ E' M ∆R E M B ∆P D Source: Adapted from Khan. Montiel.
The World Bank RMSM Model 26 .
l Objective: make explicit the link between mediumterm growth and its financing. 27 .Revised Minimum Standard Model: l Precursor to the RMSM-X model. l Developed in the early 1970s.
0 < α < 1 è (23) (24) Cp = (1 .T). 0 < s < 1: marginal propensity to save.s)(y . 28 . è Imports: J = αy.Five relationships (prices taken as given): è I = ∆y/σ (22) σ : incremental capital-output ratio (ICOR).
è Balance-of-payments identity: ∆R = X .J + ∆F è (25) National income identity: y-1 + ∆y = Cp + G + I + (X .J) (26) 29 .
s. Policy Instruments: G. α. T. ∆F Predetermined: y-1 Parameters: σ. J. 30 . Endogenous Variables: I. Cp. ∆y. Exogenous Variables: X .The structure of RMSM: Target Variables: ∆R.
T . l Determine feasibility of particular growth rate given alternative financing scenarios. 31 .Two-Gap Mode: l Determine financing requirements for alternative target rates of output growth and official reserves.X) (30) (y .T . (T . Saving Constraint: l Begin with national income accounting identity. I = (y .X ): foreign savings.Cp) + (T . (J .Cp): private sector savings.G) + (J .G) : public sector savings.
Figure 4 The RMSM Model in Two-Gap Mode I Zone IV T Zone II S Zone I 45º Zone III S T ∆F 32 .
l Incomplete. l Relative prices and induced substitution effects among production factors (and their possible impact on exports. essentially a growth-oriented model with emphasis on a small number of real variables and no financial side. Assumes imports as essential for investment and growth.Three criticisms: l Difficulty identifying binding constraint a priori. 33 . for instance) are neglected. thereby freeing foreign exchange necessary for investment. however. saving gap can also be closed by combination of reducing imports or increasing exports.
The Merged Model and RMSM-X 34 .
Equations: l Changes in real output.δ)∆E. ∆Y = ∆Py-1 + P-1∆y. l As in extended model. ∆P = δ∆PD + (1 .The Merged IMF-World Bank Model Combines extended model and RMSM model. l ∆y = σI/(1 + ∆P). ∆P* = 0 35 . relative prices affect imports and domestic absorption.
l Money supply identity ∆M = ∆L + ∆R.l Domestic credit ∆L = ∆Lp + ∆Lg. with ∆R = E∆R* 36 . with ∆Lp = θ∆Y.
ηE-1)∆E + E-1(α∆y + η∆PD). 37 . X: exogenous. with ∆F = (1 + ∆E)∆F*. l Nominal imports: J = J-1 + (QJ-1 .l Balance of payments: ∆R = X .J + ∆F.
l Flow equilibrium of the money market: ∆Ms = ∆Md 38 .l Money demand: ∆Md = v-1∆Y.
Government budget constraint:
G - T = ∆Lg + ∆Fg.
Private Sector Budget Constraint:
(Y - Cp - T) - I = ∆Md - ∆Lp - ∆Fp
Cp = (1-s)(y - T), private sector budget constraint implies,
I = s(Y-1 + ∆Y - T) + ∆Lp + ∆Fp - ∆Md. (47)
Structure of the merged model: Target Variables: ∆R,∆PD, ∆y Endogenous Variables: ∆Y, ∆Lp, ∆M, ∆P, ∆J, G-T Exogenous Variables: X, ∆F = ∆Fp + ∆Fg Policy Instruments: ∆Dg, ∆E, G or T Predetermined: y-1, P-1 Parameters: ν, δ, α, θ, η.
The Merged IMF-World Bank Model
M Y A'
B Y M
General RMSM-X model characteristics: often consist of four economic sectors: the public sector.The RMSM-X Framework Expanded version of the RMSM model (see World Bank. along the tradition of the financial programming approach. and the external sector. the consolidated banking system. the private sector. and government accounts. In practice. 42 l l l . a monetary sector. 1997b): Merged IMF-World Bank model described earlier (adds to the RMSM model a price sector. RMSM-X models fairly detailed.
money and foreign assets in standard model. Two types of financial assets. Money demand function frequently follows Polak model. 43 . National accounts derived via aggregation of the sectoral budget constraints serve to close the RMSMX model. constant income velocity of money. some versions include (particularly for middle-income countries) domestic bonds.l l l l Budget constraints associated with each sector.
Imports: several categories with the demand a function of the real exchange rate and either real GDP or (e. rather obtained as the product of the monetary base and a constant money multiplier. 44 . imports of capital goods) gross domestic investment.l l l Some models disaggregate banking system structure: here Ms is not equal to the sum of central bank credit and official reserves.g. so that substitution effects can be analyzed on the demand side. Prices: assume domestic and foreign goods are imperfect substitutes.
Model closures: Public sector closure: values for all variables except public sector expenditure and domestic borrowing specified. and the model estimates private sector variables.l l l Consumption: generally assumed to depend only on disposable income---thereby excluding consumption-smoothing effects. 45 . Private sector closure: values for government expenditure and revenue are specified. latter two variables then determined by model.
l l l l Marginal economic agent: In both approaches. through the balance-of-payments identity. 46 . In public sector closure. likely disbursements from external donors provide estimate of external financing. Gap financed by marginal economic agent. central government is marginal borrower and foreign commercial banks are assumed to be the marginal foreign creditor. External borrowing requirements determined separately.
Programming Mode: è targeted values given. è RMSM-X then solved for mix of fiscal. 47 .l l Policy closure as availability mode: all external financing identified in advance and imports are adjusted to equilibrate BOP. monetary and exchange rate policies consistent with targeted values.
Three-Gap Models 48 .
l l Two gap RMSM approach extended to three-gap framework by Bacha (1990). Addition of fiscal gap links foreign exchange availability directly to the rate of growth of productive capacity and only indirectly to the actual level of real output. 49 .
XN. l ~ I ≤ (XN + H)/δ 50 . based on external demand.l Suppose (non-capital) imports are invariant and there is an upper bound on exports. First gap: foreign exchange constraint.
~ 51 . è foreign capital inflows serve to finance government’s budget deficit. Second gap: saving constraint I ≤ Sp + (T .l Cp: assume exogenous.G) + H Setting up the fiscal constraint: l Suppose: è money money is only asset available. ~ p= y S ~ .Cp l with y bounded from above by full capacity output.
l Suppose: private and public investment are complements: Ip ≤ φIg. θ) + (T . Ig + Igφ = I. φ: ratio of private to public investment in capital stock. (1 + φ) Ig = I l Third gap: fiscal constraint I ≤ (1 + φ)[h(π.G) + H] 52 .
291). p.Θ) + (T-G)] S I* G S ~ S p+ (T-G) X/δ ~ F 0 H* H Source: Adapted from Bacha (1990. 53 .6 The Three-Gap Model I F G (1+φ)[h(π .Figure 9.
The 1-2-3 Model 54 .
l Price rigidities common. l Demand side: typically consider several households. 1991). l 1-2-3 captures features of CGE models: highly disaggregated models (on both the demand and the supply side) designed to study issues such as the allocational and distributional effects of domestic and external shocks (see Bandara. CGE (computable general equilibrium) models. l 55 .Developed at the World Bank by Devarajan et al. (1997).
The IIASA model 56 .
et al § Aimed at incorporating the potential macroeconomic impacts of natural disasters into the macroeconomic projections of developing countries § The methodology extends the RMSM-X model. Martin.Modelling approach § Developed by IIASA in collaboration with P. the model is supply-side oriented and focuses on short to medium term macro imbalances. L. 10-year forecasting period § The model offers an economy-wide consistency framework 57 . Freeman.
The SIM model 58 .
incorporating production chronology and appears to be particularly useful to “simulate” the dynamic process of impact propagation and structural change in the short run 59 .Modelling approach § The Sequential Interindustry Model (SIM) was first introduced by Romanoff and Levine in 1981 as an extension of input-output framework that can trace the production process and the path of an impact § SIM turns the static input-output analysis into a dynamic formulation.
Modelling approach § SIM connects the macroeconomic nature of input-output analysis with the microeconomic process of production process § The dynamics are represented by an anticipatory as well as a responsive mode 60 .
Conclusions § There is little research on the dynamics of macroeconomic effects of disasters § The empirical evidence is limited and more case studies are required to understand the intertemporal path of impacts § Consistency models. SIM and others may provide new insights on the dynamics of impact propagation § Consider data limitations in developing countries and the need to develop a parsimonious economy-wide model 61 . extensions of the RMSMX.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.