Simulating Impacts on Regional Economies: A Modelling Alternative

Guy R West; Randall W Jackson

Practitioners and academics apply a range of regional economic models for impacts assessment. These models extend from simple economic ase through to input-output and econometric models and computable general equilibrium models. All such models have strengths and weaknesses. Dimensions on which impacts assessment models are often compared include level of industry detail, data availability, and omplexity of behaviour modelled. This paper presents a model for simulating impacts on regional economies (SIRE) that occupies an intermediate position between input-output (IO), arguably the most widely used model for regional impacts assessments, and computable general equilibrium (CGE) models. With greater behavioural detail than the typical regional IO model, the SIRE model incorporates many of the features of CGE models without enforcing the strictly linear behavioural relationships of IO. Like most CGE models, the simulation framework presented here borrows a subset of parameters from an existing econometric model for the same region. The SIRE model falls short, however, of the complexity of capturing the full range of behaviours of CGE models. Regional CGE models are often criticised for lack of industry detail, lack of hard data, and relatively high costs of model construction, while conventional input-output models are criticised for limiting assumptions. Foremost among these assumptions is homogeneity of degree one. As is well documented in the literature, the household sector is the dominant component of multiplier effects in an input-output model, so capturing marginal income and expenditure relationships for the household sector can provide a more realistic representation of the economic system and a departure from the strict linearity assumption. Further, since marginal in some changes alter value added relationships by industry, effects on regional output prices as well as import proportions also can be simulated. Several implications arise from the SIRE model. Firstly, while the output multipliers and impacts may not be very different from a corresponding IO model, income and employment impacts should be smaller in a model using marginal coefficients. This is because many industries can increase output without corresponding proportional increases in employment and income payments. This is the case particularly in the short run and especially for those industries that are more capital intensive and can implement productivity gains. However, when price effects are incorporated into the model, the direction of change becomes less clear, since these potentially can generate compounding or offsetting changes. Secondly, unlike either the CGE or the conventional input-output model in which multiplier values are the same for all multiples of the initial shock, the multiplier values from the SIRE model vary with the size and distribution of the initial impact. Larger changes in final demand will tend to be associated with smaller multipliers than small changes in final demand. Therefore, the differential impacts of SIRE model are not additive, as are those from the conventional Leontief model and CGE model.

Simulating Impacts on Regional Economies: A Modelling Alternative

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