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A Forward Calibration Method for New Quantitative Trade Models

Frank Pothen and Michael Hübler

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: This article introduces an innovative and exible dynamic forward calibration method for disaggregated new quantitative trade models, particularly the Eaton and Kortum model, within a computable general equilibrium framework. The model is parameterized based on distinct, consistent future development scenario assumptions about EU climate policy, economic growth, energy efficiency, the electricity mix and structural change (sectoral shifts) derived through a complex scenario-creation process. The model equations and the scenario assumptions are implemented as side constraints of an optimization problem minimizing the difference between historical and targeted technology levels (sectoral productivities). This method is combined with input-output data disaggregation methods to separate Northwest Germany from the rest of Germany and to represent different power generation technologies. This setup enables the comparison of alternative regional sustainability-oriented long-term policy pathways. Despite the importance of the policy pathways envisaged by Northwest Germany's governments to society, they have limited macroeconomic effects in the simulations. In contrast, the future development scenario assumptions significantly affect European economies, particularly via the EU climate policy costs that drastically increase towards 2050. If Northwest Germany's energy transition fails, then its climate policy costs will increase extraordinarily.

Keywords: EU climate policy; forward calibration; regional model; structural estimation; new quantitative trade theory (search for similar items in EconPapers)
JEL-codes: C68 F17 L16 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-ene
Date: 2018-11
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