Update of Elasticities in the HERMIN Model

10.21
2010
In this study, the HERMIN model and a regional CGE model for five European countries (Germany, Poland, Slovak Republic, Czech Republic and Hungary) were compared and contrasted for the calculation of spill-over elasticities. These elasticities were to be applied within the HERMIN model for determining the impact of investments co-financed by the European Cohesion fund. An approach was developed to determine the spill-over elasticities from the CGE model by using real investment projects. The unifying idea of the project was that the impact of physical infrastructure, RTD and human capital on TFP should be evaluated through the CGE model and should be micro-founded. We compared the two models and took steps to gain consistency.

The project leader was TNO, TML assisted TNO in the further development of the CGE model and calculating shadow prices on its basis. Shadow prices are defined as a marginal change in social welfare over a change in one unit of a production factor, resource or any type of commodity or service. These numbers can be used, similarly as output- or input-multipliers in Input-Output analysis for application in Cost-Benefit Analysis.

TML was able to develop an approach to calculate the shadow prices, on the basis of conversion factors, that are determined directly from small shocks in the input factors or prices within the model. Besides this, we proposed a number of improvements in the CGE model to avoid erroneous results. These included:

- An update in the calculation of the social welfare indicator
- Recalibration of regional trade balances
- Some minor changes to the calibration of the model
The CGE model used in this study was a prototype of the RHOMOLO model, now under full development at the Joint Research Centre of the European Commission (JRC). TML was not involved in any further development of the RHOMOLO model after this study and currently has neither access nor right-of-use of the model.

For any questions concerning the use of RHOMOLO we refer to the development team of RHOMOLO at JRC.

http://ipts.jrc.ec.europa.eu/activities/research-and-innovation/regional_economic_modelling.cfm

Period

2010

Client

European Commission, DG REGIO

Partner

Nederlandse Organisatie voor Toegepast Natuurwetenschappelijk Onderzoek (TNO), CPB and Cambridge econometrics

Our team

Christophe Heyndrickx
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