A Heuristic Approach to the Estimation of Key Parameters for a Monthly, Recursive, Dynamic CGE Model

As economic losses brought about by natural disasters mount, assessing the economic impact of a possible future natural disaster is becoming increasingly important. A computable general equilibrium (CGE) model and an input-output (I-O) model are strong candidates for performing such an assessment. E...

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Bibliographic Details
Published in:Economics of disasters and climate change 2018, Vol.2 (3), p.283-301
Main Authors: Yamazaki, Masato, Koike, Atsushi, Sone, Yoshinori
Format: Article
Language:English
Subjects:
Climate
Climate Change
Economics
Economics and Finance
Environmental Economics
Environmental Sociology
International Environmental Law
Natural Hazards
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Summary:As economic losses brought about by natural disasters mount, assessing the economic impact of a possible future natural disaster is becoming increasingly important. A computable general equilibrium (CGE) model and an input-output (I-O) model are strong candidates for performing such an assessment. Even though a CGE model is more comprehensive and flexible than an I-O model, the CGE approach is often subject to criticism because key parameters are often not appropriately estimated. The purpose of this study is to calibrate two sets of key substitution parameters: the elasticity of substitution between labor and capital services and the elasticity of substitution among like goods of different origins, using a monthly, recursive, dynamic CGE model. For the calibration, this study employs a heuristic method, in which the model’s substitution parameters are adjusted to reproduce actual production losses from the 2011 Great East Japan Earthquake. In addition, we test whether the CGE model can reproduce the actual economic recovery from this earthquake. Overall, we find that our model does reproduce the disaster’s economic dynamics of recovery, as well as its short-term economic impact.
ISSN:2511-1280
2511-1299
DOI:10.1007/s41885-018-0027-4