RegFin models
RegFin and RegFinDyn simulation models
The development of a Finnish multi-sector and interregional CGE (Computable General Equilibrium) RegFin simulation model commenced in 1998. The model was first static, but after considerable development work there is now a recursive dynamic model called RegFinDyn. The RegFin models have been used in over 25 reported applications relating to regional and rural policy, infrastructure investments, bio energy, mitigation of greenhouse cases of agriculture etc. The use of the dynamic model increased steadily during 2007-2008.
RegFinDyn is light in data requirements and can easily be replicated to another country. This has already been done for Poland (RegPolDyn). Our Polish partner is PhD Katarzyna Zawalinska from the Polish Academy of Sciences (IRWiR). She is also a Deputy Director of the IRWiR Institute. The Finnish model has 20 regions (maakunta) and 27 sectors (primary, industry, services) for each region. For Poland, the model has 16 regions and 15 sectors per region. The Ruralia Institute of the University of Helsinki and professor Hannu Törmä are the main developers of the model. There is also a plan to replicate the model for Japan (RegJpn) with Associate Professor Fumihiko Koyata from Hirosaki University.
Structure of the RegFin Models
Production
The model represents both factor and commodity markets. Each of the sectors produces commodities by using three factor inputs, capital, labour and land. The products are sold in the commodity markets to the consumers of the local domestic region, through domestic exports to the consumers of the other domestic regions and through foreign exports to the consumers of the foreign countries. Goods and services, such as intermediate raw materials, are also imported for the demands of regional production. These are bought through domestic imports from the other domestic regions and through foreign imports from abroad. The production technology has been implemented using nested Constant Elasticity of Substitution/Transformation (CES/CET) production/transformation functions. Domestic and foreign commodities have been assumed to be qualitatively different, so the Armington (1969) assumption has been used. Technical change can be capital, labour, land, primary input (capital, labour and land together) or all-input (including the intermediate inputs) augmenting.
Consumption and investment
The demand for commodities is divided between private consumption (one representative household per region including non-profit organisations) and public consumption (regional and national government including social security funds). Investments are determined in a dynamic setting which takes into account both depreciation of the capital stock and expected rate of returns. The investment function is of the logistic form. Investors are assumed to be both conservative and myopic; only past and current rates of return affect the expected rate for the following period.
Taxes and subsidies
The income taxes and transfers of the regional and national governments affect the disposable income of the regional household. The model also takes into account the transfer system between the regional and national governments. RegFinDyn also includes all factor and commodity taxes and subsidies in an ad-valorem form. All regional representative households consume regional, national and foreign goods and have nested CES utility functions. National and regional governments have CES production and utility functions. All functional forms can easily be changed to Leontief, Cobb-Douglas etc.
The labour market
There are two kinds of labour dynamics in the model. Real wages adjust both on the national and regional levels. National wages will rise where national employment rises above the trend. This mechanism will create an upward sloping labour supply schedule, which continually moves to the right or up as long as actual employment exceeds the trend. On the regional level, a regional wage equation causes real wages to rise where employment rises. It is also possible to specify national, regional or sectoral wage agreements via so-called switch variables. The model allows the case where the labour market is out of equilibrium, so there is unemployment. Here the unemployment rates and real wages are determined jointly according to the wage curve theory (Blanchflower and Oswald, 2006).
Net migration
Another special feature of the RegFinDyn model is that regional net migration (out-migration minus in-migration) has been included. Net migration is explained by regional economic growth and unemployment differentials. Economic growth differential is measured by the ratio of the GDP of the region to the GDP of the whole country. Unemployment differential is measured by the difference of the regional unemployment rate to the unemployment rate of the whole country. If the economic growth of the region is higher than in the whole country, this prevents out-migration and strengthens in-migration, so net migration decreases. The economic growth will lower the region's unemployment rate, causing out-migration to decrease and in-migration to increase, so net migration will decrease. The net migration equation coefficients were estimated by using pooled cross-section and time-series data.
Walrasian: prices will adjust
RegFinDyn is a so-called Walrasian CGE model. According to the basic principles taught by Léon Walras, "everything is affecting everything in the economy". The central assumption of the model is that prices are flexible and will adjust until the economy has reached a new equilibrium following a shock. Mathematically, a CGE model is a system of linear and non-linear definition, behavioural, and equilibrium equations. Numeric algorithms have been developed that can be used to find the new equilibrium prices and quantities.
In a static setting, by comparing the benchmark and new equilibrium, the researcher can perform comparative-static calculations to see how the key macro variables of the economy, such as regional GDP, employment, income, consumption, investment etc. have been affected by the shock. In a dynamic setting, the model is solved for a sequence of several years, say 2009-2020. It is then possible to analyse the adjustment of the regional economy to the shock, variable by variable and on a year-to-year basis.
The data
The RegFinDyn database comprises the regional Social Accounting Matrices (SAMs), which are based on the 2002 regional input-output tables produced by Statistics Finland. This is the second regional input-output study published in Finland, so we are using the latest available data. The SAMs also contain information about different categories of incomes and the expenditures of regional households and regional and national governments. Data about unemployment rates, employment, net migration, investments, capital stocks and depreciation rates on a regional basis and from the benchmark year are also needed. The model has been calibrated to the economic structure of the benchmark year 2002. The base path of the regional economy beginning from the benchmark year is constructed, and it will bring the model to the level of the present day. This is based on the latest official regional statistics. All numbers have been obtained from the official databases of Statistics Finland.
Elasticity values
Sectoral values for substitution elasticity between capital and labour have been estimated from Finnish time-series data. Other substitution/transformation elasticities are estimates from foreign econometric studies and/or the CGE literature and range typically from 0 to 4. The deviation of employment from its trend value and national and regional wage elasticities are estimated from Finnish time-series data. Sensitivity analyses of the elasticity and shock values/sizes are always done.