Table D2.
Closures used for COVID simulations
| Variable in model (originally endogenous) | Description | Variable in model used for swap (originally exogenous) | Description |
|---|---|---|---|
| Consumption of Essential goods was fixed | |||
| qp_agg(“essentials”,REG) (not in GTAP) | Aggregated private household consumption of all essential and all non-essential commoditiesa | dpp_agg(“essentials”,REG) (not in GTAP) | Distribution parameter applied to private consumption of essentials. Implemented using methods discussed in Walmsley and Minor (2020b) |
| Fixed Government spending | |||
| yg(REG) | Government expenditure | dpgov(REG) | Distribution parameter on government spending |
| dpav(REG) | Average distribution parameter on Cobb Douglas function of regional householdb | dpsave_shift1(REG) (essentially dpsave in the GTAP model) | Savings distribution parameterc |
| Demand for Health fixed | |||
| qp(“hht",REG) and qg(“hht”,REG) | Consumption of health care by private and government assumed fixed | dpp_stop(“hht",REG) and dpg_stop(“hht”,REG) | Phantom taxes on demand for health care |
| Turned off a long run adjustment in the dynamic modeld | |||
| DKHAT(REG) (GDyn model variable) | Change in normal growth rate from GDyn model | SDKHAT(REG) (GDyn model variable) | Shifter to turn off equation determining the change in normal growth rate |
Each commodity is categorized as either essential or non-essential (mapping MAPTC2TCA), then this is used to create an aggregate consumption bundle of essential goods that can be held exogenous. In GTAP notation: qp_agg(a,s) = sum(i, TRAD_COMM: MAPTC2TCA(i) = a, SHRVPA(i,s) * qp(i,s)), where SHRVPA(i,s) = VPA(i,s)/sum(k, TRAD_COMM: MAPTC2TCA(k) = i, VPA(k,s)).
If a distribution parameter for consumption, government spending or savings is altered, this causes the other expenditures to adjust and ensures that expenditure equals income. Since a Cobb-Douglas function is used changes in the distribution parameters also represent changes in shares and the shares must always sum to 1.
Adjustment required to ensure that savings adjust in response to fixed government spending – i.e., the government deficit rose or fell. The GTAP model uses a regional household and fixing government spending using only the first closure swap, causes both savings (government deficit) and private consumption to adjust to ensure equilibrium. Ordinarily this does not cause any significant issues, but in the case of COVID, where changes in income are significant, the adjustments in savings and private consumption can be large.
The Dynamic GTAP (GDyn) model theory allows for a ‘normal’ growth rate in an economy that gradually converges on the typical, average growth rate of the economy. This gradual convergence occurs as the normal growth rate partially adapts to changes in the actual rate of return, believing that over time changes these changes in the actual return will be incorporated into the long run average. In these simulations we did not allow the normal growth rate to respond to the reduction in actual growth caused by COVID. The assumption is that COVID is an unusual and temporary event that significantly reduces economic growth in the short run, but is unlikely to impact a country's normal, long run rate, particularly during the short period we considered. This reduces the variability in the movement of investment between countries in response to differences in the timing of mandatory closures across countries due to the cyclical nature of COVID variants.