Quest II
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QUEST II( QUarterly Econometric Simulation Tool, Version 2) is dynamic macroeconomic model of the world economy. It is especially designed to analyse the economies in the member states of the European Union and their interactions with the rest of the world, especially with the US and Japan. The focus of the model is on the transmission of the effects of shocks and economic policies both on the domestic and the international economy.
- It is a multi-country model, treating separately each EU member state (we are currently working on adding the new member states), the US, Japan and the rest of the world (divided into 10 regions). The regions are linked through trade and financial flows. There is a five region version which distinguishes EU, USA, Japan, Slow and Fast Ageing RoW.
- Households and firms solve optimal dynamic decision problems under technological, financial and institutional constraints.
- It is a multi-period model, involving dynamics of capital accumulation and technological progress, stock and flow relationships and forward looking expectations.
The model includes a government sector and allows to analyse public finance issues both on the expenditure and revenue side. The government sector obeys an intertemporal budget constraint. The model can be run under alternative exchange rate regimes. Monetary policy is modelled via an interest rate reaction function (Taylor rule).[1]
Result
Typical Model Applications:
- Simulation of the effects of fiscal and monetary policy
- Evaluation of European Commission structural policies (e. g. Structural Funds, TENs, Internal Market)
- Analysis of long term issues, (e. g. demographic changes)
- Analysis of short term shocks (e. g. exchange rate shocks)
- Medium term projections (over 5 years)[1]
Sectoral coverage:
- Private households, public sector, corporate sector
Consumption categories:
- Private (domestic and foreign) and public consumption.
Behavioural assumptions:
- Households: Consumption expenditure and wages result from the process of the intertemporal utility maximisation of the representative household under an intertemporal budget constraint. For the determination of wages it is assumed that workers have a certain degree of market power. At the second stage, a static utility function is maximised and total consumption expenditures are allocated to consumption categories.
- Firms: Monopolistic competition is assumed. Firms produce with a constant return to scale technology with a two-level nested constant elasticity of substitution specification. Each producer maximises his profit and generates his factor demands for production, including demands for capital, energy and labour. Firms set prices optimally as a mark up over marginal cost and subject to convex price adjustment costs.[1]
Government behaviour:
Government expenditure (exogenously given spending pattern):
- Government consumption
- Public investment
- Transfers to households (social benefits)
- Product and export subsidies
- Foreign sector transfers
Government revenue:
- Labour income taxes and social security contributions
- Indirect taxes
- Energy and environmental taxes
- Value-added taxes
- Property taxes
- Capital taxes
- Import duties
- Revenues from government enterprises.
Finally the government must respect an intertemporal budget constraint.[1]
Dynamic structure:
- Dynamic with forward looking rational expectations
- Periods of time are linked through adjustment processes of capital, net foreign assets, government debt. Also wages and prices adjust sluggishly due to institutional constraints and market imperfections.
- Exogenous technical progress (neutral or factor-augmenting)
Linkage between regions and countries:
QUEST II can be used either in the single-country version where the rest of the world is an aggregate of all other countries/regions or the multi-country version where individual countries are linked by endogenous (price dependent) bilateral trade and financial flows. Regarding aggregate demand for products, QUEST II uses an Armington specification. In a first stage, domestic demand is allocated to imports and domestically produced goods; at a second stage, imported goods are distinguished depending on their country of origin. The demand for exports is defined as the sum of the demand for imports of all other countries/regions for the goods of one country. The current account is endogenous and is equilibrated via exchange rates and wealth effects.[1]
Market Structure:
Product market:
- Monopolistic competition
Labour market:
- Search model with Nash Bargaining.
Main Model Results:
Macro economic results:
- GDP, production, investment, private and government consumption, external trade, trade balance, relative prices, employment, primary factor income and transfers, tax incidence and revenues, labour productivity, wages, prices, interest rates and exchange rates
- Energy consumption.[1]
Required technical infrastructure:
The model is formulated and solved with the TROLL software package.
Structure of Input Data:
Exogenous variables and parameters:
- Variables that can be adjusted for the purpose of policy analysis (e.g. tax rate, emission reduction targets)
- Bilateral trade matrix.
- Coefficients of the behavioural (utility and cost) functions, e.g. substitution elasticities in production function or Armington elasticities (taken from economic literature and own econometric estimations)[1]
Data:
- National accounts data (data sources: AMECO, EUROSTAT).
Calibration/Estimation:
- Behavioural equations are either estimated or calibrated.
- The forward extension for the baseline solution is based on assumptions about technical progress, the national public policies, demographic trends as well as projections about fiscal and monetary trends
Regional Scope:
QUEST II: EU-14 countries (EU-15 without Luxembourg) and new member states, not yet completed.
QUEST II-Ageing Model: 5 regions (EU15, USA, Japan, Fast Ageing RoW, Slow Ageing RoW)[1]
See also
References
Roeger, W., In't Veld, J. (1997), QUEST II - A Multi Country Business Cycle and Growth Model, Economic Paper European Commission, Directorate-General for Economic and Financial Affairs, No. 123.
In't Veld, J., Orlandi, F., Sestito, P., Suardi., M. (1999), Italy's slow growth in the 1990s: Facts, Explanations and Prospects. In: European Commission (ed.), European Economy, No.5, Brussels.
Giudice, G., Turrini, A., In't Veld, J. (2003), Can Fiscal Consolidations be Expansionary in the EU? Ex-post Evidence and ex-ante Analysis. In: European Commission (ed.), European Economy, No. 195, Brussels.