Book contents
- Frontmatter
- Contents
- PREFACE
- ACKNOWLEDGEMENTS
- INTRODUCTION AND SUMMARY OF STUDY
- PART I The General Equilibrium Model of the UK – Structure, Data and Model Solution.
- CHAPTER 1 General Equilibrium Analysis of Tax and Subsidy Policies
- CHAPTER 2 The Basic Variant General Equilibrium Model
- CHAPTER 3 Model Treatment of UK Taxes, Subsidies and Government Expenditure
- CHAPTER 4 Calibrating the model
- CHAPTER 5 Benchmark Equilibrium Data Set
- CHAPTER 6 Specifying Values for Substitution Elasticities
- PART II Empirical Analysis of the UK Tax/Subsidy System Using the General Equilibrium Model
- SUMMARY AND CONCLUSIONS
- APPENDIX A Structure of the Basic Variant Model
- APPENDIX B Notes to Tables Appearing in Chapter 5
- APPENDIX C Notes on Programming and Computation
- BIBLIOGRAPHY
CHAPTER 4 - Calibrating the model
Published online by Cambridge University Press: 04 August 2010
- Frontmatter
- Contents
- PREFACE
- ACKNOWLEDGEMENTS
- INTRODUCTION AND SUMMARY OF STUDY
- PART I The General Equilibrium Model of the UK – Structure, Data and Model Solution.
- CHAPTER 1 General Equilibrium Analysis of Tax and Subsidy Policies
- CHAPTER 2 The Basic Variant General Equilibrium Model
- CHAPTER 3 Model Treatment of UK Taxes, Subsidies and Government Expenditure
- CHAPTER 4 Calibrating the model
- CHAPTER 5 Benchmark Equilibrium Data Set
- CHAPTER 6 Specifying Values for Substitution Elasticities
- PART II Empirical Analysis of the UK Tax/Subsidy System Using the General Equilibrium Model
- SUMMARY AND CONCLUSIONS
- APPENDIX A Structure of the Basic Variant Model
- APPENDIX B Notes to Tables Appearing in Chapter 5
- APPENDIX C Notes on Programming and Computation
- BIBLIOGRAPHY
Summary
This chapter discusses the selection of parameter values for the equations of our model. The approach followed is to use the equilibrium solution concept of the model and adopt a simple calibration procedure. This calculates parameter values consistent with an assumed equilibrium contained in observed data after adjustments are made to it to ensure all equilibrium conditions hold. We term this a ‘benchmark equilibrium’.
The size of the model and its integrated structure make it impossible to simultaneously estimate all parameter values using conventional simultaneous equation econometric techniques. The number of exogenous variables is small, and extensive use of excluded variables as identifying restrictions is not possible because of the general equilibrium interdependence which the model captures. If, as an alternative, single equation estimation is used, parameter estimates will be obtained which do not necessarily generate an equilibrium consistent with observed data. To achieve this consistency, parameter values for equations are calculated from observed data (after adjustments) using the equilibrium conditions of the model. We utilize this data set along with extraneous elasticity estimates required in our calibration procedure.
Since the data used must simultaneously satisfy all model equilibrium conditions, a large amount of work is involved in the construction of a consistent equilibrium data set. In addition, since this data set only yields observations on expenditures, a time dependent units convention is used to separate price and quantity observations.
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- Information
- UK Tax Policy and Applied General Equilibrium Analysis , pp. 99 - 118Publisher: Cambridge University PressPrint publication year: 1985