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Stiftelsen frischsenteret for samfunnsøkonomisk forskning Ragnar Frisch Centre for Economic Research www.frisch.uio.no Two calibration submodels in LIBEMOD.

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Presentation on theme: "Stiftelsen frischsenteret for samfunnsøkonomisk forskning Ragnar Frisch Centre for Economic Research www.frisch.uio.no Two calibration submodels in LIBEMOD."— Presentation transcript:

1 Stiftelsen frischsenteret for samfunnsøkonomisk forskning Ragnar Frisch Centre for Economic Research www.frisch.uio.no Two calibration submodels in LIBEMOD Sverre A.C. Kittelsen

2 Ragnar Frisch Centre for Economic Research Problem 1. Calibrating final demand Linear demand functions not consistent outside calibration point Too flexible in cross-price elasticities Corner solutions possible –Zero demand or zero prices No easy period demand functions –Share functions possible for periods –Then why not use share functions for all model final demand?

3 Ragnar Frisch Centre for Economic Research Constant Elasticity of Substitution (CES) demand systems Flexible in structure Consistent behaviour globally, thus also reasonable elasticities Exact calibration of own- and crossprice target elasticities not possible –Because target elasticities may not be consistent CES is homogenous of degree 1 –Without shift parameters, income elasticity is allways 1

4 Ragnar Frisch Centre for Economic Research CES and linear demand functions p x p0p0 x0x0

5 Ragnar Frisch Centre for Economic Research CES Nested Utility tree Endogenous commodities Exogenous commodities Nests  - substitution parameters Nodes = Nests+Commodities x - quantities p - prices Goods = Nodes – {T} a - share parameters

6 Ragnar Frisch Centre for Economic Research Calibration: Demand function parameters determined by calibration submodel: Some reasonableness restrictions (e.g. 0<sigma<2.5) Calibration demand level allways on target Income elasticities allways on target Own price elasticities usually near target Cross price elasticities often far from target

7 Ragnar Frisch Centre for Economic Research Problem 2: Electricity block calibration Unknown fuel efficiency distribution –Only average country-technology efficiency known Observed behaviour deviates from optimal Period production from each technology unknown

8 Ragnar Frisch Centre for Economic Research Unknown fuel input requirement function (inverse efficiency distribution) Period CapacityY Best

9 Ragnar Frisch Centre for Economic Research Unknown period production by technology

10 Ragnar Frisch Centre for Economic Research Constrained cost minimisation Usual problem, each agent maximizes profit FOC: Calibration problem, each country minimizes short run costs FOC:

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