1. Where We Work

Macro-Modeling At The World Bank

Computable General Equilibrium

Computable General Equilibrium (CGE) models are used for counterfactual policy and economic scenario analysis. A CGE model relies on micro-founded economic theory that determines how economic agents react to various changes in the economy given the availability of resources. The standard set of economic agents in a CGE model includes households, production activities, government, and the rest of the world. The model often includes multiple representative economic agents for each of those such as several households based on their socio-economic status and production activities based on their sectors.

CGE models are well-suited for estimating the long-term, economy-wide effects of policy reforms as they can capture the many complex direct and indirect effects of a policy change. For example, subsidy reforms lead to an improvement in the government budget balance and allow for various policy options given the additional fiscal space. The policy would also impact relative prices, consumption decisions, factor demand, and income distribution. A CGE model can estimate the effects of all these channels on the economy.

The distributional effects of a policy can also be estimated by combining the CGE model with microsimulation modules. Quantifying distributional effects can assist policymakers in understanding the costs and benefits of reform options and help design appropriate compensation packages for industries or households.

The CGE modeling team provides modeling services to internal and external World Bank clients. The models are customized to the needs of the clients based on the policy questions of interest. The model can be tailored along dimensions such as sectoral detail, regional detail, factors of production (natural resources, foreign workers, etc.), and policy levers (e.g., taxes, subsidies).

 

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  • The modeling team develops customized CGE models either as a general standalone tool for transfer to national authorities or for analyzing specific questions determined by the client (national authority or World Bank Group country team). Models are built using the climate and energy policy-aware CGE frameworks MANAGE-WB, CGEBox or ENVISAGE.


    MANAGE-WB model

    The Mitigation, Adaptation, and New Technologies Applied General Equilibrium at the World Bank (MANAGE-WB) model is a (recursive) dynamic single-country CGE framework developed at the World Bank. It is based on the MANAGE model as documented in van der Mensbrugghe (2021).

    In addition to standard economic analyses, MANAGE-WB has been designed to address climate change-related issues, notably: energy, emissions, and climate damages. MANAGE is a dynamic model, using by and large the neo-classical growth specification. Labor force growth is exogenous. Capital accumulation derives from savings/investment decisions. The model allows for a wide range of productivity assumptions that include autonomous improvements in energy efficiency that can differ across agents and energy carriers. The model has a vintage structure for capital that allows for putty/semi-putty assumptions with sluggish mobility of installed capital.

    The MANAGE-WB model embeds several additional features such as:

    • Flexible production nesting that allows users to easily modify the production structure,
    • Intra-fuel energy substitution across all demand agents
    • Multi-output multi-input production structure
    • Recursive updating of elasticity of substitution between capital and energy
    • Multiple land types and a land nest in production
    • Detailed demographics by age
    • Calibration of emission coefficients to emission inventories from national authorities or the CAIT database
    • Emission accounting framework allowing tracking of several pollutants (e.g., air)
    • Taxation of industrial process and product use emissions as well as factor-based emissions (e.g., livestock)
    • Climate damage and adaptation functions

    The model can be calibrated to any Social Accounting Matrices (SAM) that follow a standard set of conventions in representing the economic structure.

     

    CGEBox model

    CGEBox provides a flexible, extendable, and modular code basis for CGE modeling in GAMS drawing on the GTAP database, combined with a powerful user interface based on GGIG (GAMS Graphical User Interface Generator). Its core draws on the GTAP Standard model version 7 in GAMS by van der Mensbrugghe (2018). Like most global, multi-regional CGE models, the default model assumes perfect markets for products and factors, suppliers and demanders without market power, cost-minimizing firms, and utility-maximizing consumers. A representative household owns the primary factors, which are allocated to firms to maximize revenues. International trade is depicted by the Armington assumption such that each region produces a specific differentiated product. Specific to the GTAP Standard model is the so-called global bank which distributes global savings to maximize expected returns to changes in the capital stock. This mechanism allows for endogenous changes in the balance of trade in simulations. Some of the default assumptions, such as no market power, can be relaxed in specific modules of CGEBox. The model also embeds the regional household approach which when activated implies that income is collected by a virtual agent in each region and distributed to government and private consumption as well as savings to maximize a social welfare function.

    More information on the model can be found on this webpage.


    ENVISAGE model

    Envisage was initially developed at the World Bank in 2007 as a re-coded version of the World Bank's Linkage model (van der Mensbrugghe, 2011), which had a trade focus. It is designed specifically to analyze climate change issues and thus incorporates a more developed energy sector, a climate module (that makes integrated assessment an option), and climate change impact feedback. Envisage is coded using the GAMS/MCP package.

    The current version used at the World Bank is a complete re-coding of the original Envisage Model largely undertaken at the behest of the OECD's Environment Directorate. The core database of the Envisage model is the GTAP database that includes energy volumes and CO2 emissions.

  • The core of a CGE model is the Social Accounting Matrix (SAM). A SAM1 records data on transactions among all economic agents in an economy over a given period. SAMs expand the explanatory capacity of Input-Output tables by explicitly introducing income and its primary and secondary distribution. A model calibrated to a SAM, therefore, does not need to rely on additional satellite accounts.

    A SAM is ultimately a square matrix in which activities, commodities, factors, and institutional sectors are represented by specific rows and columns. The income of each account is shown along its corresponding row, while its expenditures are recorded in the corresponding column. Each cell records the payment by the account in the column to the account in the row. Typically, a SAM contains six types of accounts: activities and/or commodities, factors, institutions (households and corporations/enterprises), government, capital accounts, and the rest of the world. The disaggregation of these six basic groups determines the size of the matrix. The basic structure of a standard SAM is shown in Figure 1.

    SAM


    Several primary databases are used to populate the cells of a matrix. The main ones are the set of National Accounts systems, household budget, and/or labor market surveys (and others of a socioeconomic nature), as well as statistics related to the foreign sector and international trade.

    SAMs for the MANAGE-WB model include two additional features: they split government and private investment, and introduce government borrowing and debt service from and to institutions (e.g., households, enterprises, and the rest of the world). In most cases, they include household types by income deciles or quintiles, labor by a combination of skill, gender, and formality, and detailed tax accounts.

    To allow for the automatic updating of SAMs when new information (e.g., national accounts data, household surveys, etc.) becomes available or is needed for a project, the MANAGE-WB framework uses a cross-entropy approach as presented in Robinson and El-Said (2000) and further improved with a higher posterior density estimator following Britz (2020).

    SAM estimation is kept separate from the MANAGE-WB model code and is run independently. Users can introduce new information (e.g., split any accounts in SAM, update macroeconomic totals or the whole of the macro SAM, etc.) and the code balances the SAM automatically. The code also allows for incorporating GTAP data to split activities when needed.

    The modeling team has developed Social Accounting Matrices (SAMs) for several countries for specific projects. Since these SAMs usually include proprietary data, they cannot be shared publicly. However, in some cases they can be used by other World Bank teams and researchers working on these projects.
     

    1. The definition of SAM is based on Mainar-Causape et al. (2020).

  • The MANAGE-WB framework has been implemented in over 100 countries in the past 5 years. Working with different country teams on varying analyses places the modeling team at the heart of knowledge spillovers throughout the World Bank. The team carries lessons learned from one project to another and builds on the developments achieved in previous projects. This allows World Bank country teams and country clients to benefit from the knowledge created elsewhere.

    Knowledge and model innovations that the team created in key projects are now at the core of the macroeconomic analysis featured in the Country Climate and Development Reports (CCDRs), and the development of the CGE models at the World Bank is continuously evolving.

    To increase the knowledge spillovers, the team collaborates with modelers around the world and organizes training for the World Bank teams and country clients. These training workshops aim to increase the client teams’ understanding of the CGE models and to encourage the use of them for evidence-based policymaking. The workshops are an important channel to spread the knowledge and experience accumulated via several projects.

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Working paper

MANAGE-WB Model Documentation

Model framework, specifications and technical description.
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Paul Clare
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