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What-if Analysis
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The examination of what-if scenarios is one of the task for the third year of EURACE.
One task in EURACE is the application of the agent-based platform to the
economy of the European Union. The software platform will take into account the main
regional industrial and financial features of the EU economy, according to the empirical
analyses performed in WP4 on selected databases.
The software platform will be used as a tool for economic policy design and what-if analysis.
In particular, we plan to make a number of computational experiments on the following key
issues:
1. Monetary and fiscal policy design and coordination in the EMU. In the Euro-area,
monetary policy has been delegated to a supra-national authority, the ECB, while fiscal
and structural policies remain at the level of Member States, which are subject to
obligations stemming from the Maastricht Treaty and the Stability and Growth Pact. At
first, we want to investigate the impact of a single monetary policy in a setting
characterized by marked regional differences in the industrial structure, by the
composition of output and by the institutional features of labour markets. Secondly, we
plan to analyse the macroeconomic consequences and possible stabilization policies for
the EMU in the case of asymmetric productivity shocks and divergent macroeconomic
conditions. The effectiveness of monetary policy in the management of an endogenous
symmetric shock caused by a financial bubble burst will be also considered. Finally,
fiscal coordination policies different from the Stability and Growth Pact will be designed
and simulated, and the case for a single fiscal policy explored.
2. Understanding the impact of the external dimension on the Euro area: trade, capital flows
and other macroeconomic linkages. International trade in goods and services is the
traditional channel through which economies may affect each other, and represents one
of the main aspect of the euro area’s external dimension. We plan to model, as
representative agents, the main trade partners of the Euro area, such as the US, UK,
China and oil exporting countries, and to study by means of the software platform how
external shocks, transmitted to the Euro area via trade links, affects the Euro-zone
economy. A particular attention will be devoted to possible energy shocks due to a
disruption in oil supply as addressed in the next task. Cross-border capital flows
constitute another important transmission channel of possible external shock to the Euro
area. In this respect, we plan to analyze the stylized facts regarding the euro area’s
foreign direct and portfolio investment and to simulate the impact on the Euro-zone
economy of a major external financial crisis.
3. Macroeconomic consequences and stabilization policies of an energy shock. This issue
stand out for the actual emergency faced by European economies, mainly due to crudeoil
price increases. Empirical investigations spotlighted the consequence of a recession
period after the energy shocks. In particular, the following aspects will be addressed by
our analysis. First, a what-if analysis will be made in order to identify necessary
conditions for asymmetric effects for oil-price increases and decreases in the privatesector
output and real-wages. Models where the aggregate effects of energy price
increases depend crucially upon the fact that such shocks affect different sectors
differently. It is worth noting that the imperfect competition framework adopted by the
our modelling approach should increase the likelihood with real world outcomes.
Second, specific monetary policies will be investigated to control the subsequent
recession phenomena at the macro-level, considering that tightening monetary policies
may be responsible by theirselves for recessions. Third, a major focus will be devoted to
study the nature and the characteristics of the relationship between GDP and oil price
shocks.
4. Design of industrial innovation policies in the EU to strengthen competitiveness.
According to results of WP7, the effect of combinations of policy measures on the
European economy context will be considered. Different key variables will be taken into
account, e.g., rate of product innovation, average productivity mean and variance of
wages, mean and variance of general skills, average number of specific skills per worker,
number and skill distribution of employed workers. The robustness of the effects of
policy parameter changes will be checked by applying statistical test on data generated
under a large set of parameter profiles where key parameters are chosen as far as
possible, according to empirical data whereas other model parameters are varied
stochastically.
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