On 29 September 2005, Mr. Francisco Tomás Vert, Rector of the University of Valencia, and the Director of the Foundation, signed a Collaboration Agreement whose objective is to regulate the participation of the Rafael del Pino Foundation on the occasion of its contribution to the development of the Research Project "Macroeconomic modelling and regional economy" co-financed 75% by the Directorate General of Budgets of the Ministry of Economy and Finance, charged to the ERDF Funds of the Operational Programme for Technical Assistance (Objective 1) 2000-2006.
This agreement reinforces the specific lines of collaboration of the existing agreement between the Institute for International Economics and the Directorate General of Budgets of the Ministry of Finance between 2005 and 2007, in relation to macroeconomic modelling and analysis of fiscal policy and the regional economy.
The latest simulation model designed at the Ministry of Economy and Finance, MOISEES, has been widely used since its inception for the simulation and evaluation of economic policies in the Spanish economy. However, the priority it gives to the demand side over the supply side, its emphasis on the short term, and the difficulty of deriving its equations from a consistent framework, have gradually distanced it from other more modern macroeconomic models, such as the European Commission's Quest 2, the IMF's Multimod Mark 3 or the CEPII/CEPREMAP's Marmotte. It is therefore of great interest to have a simulation model that meets quality standards comparable to the aforementioned models but programmed in transparent and easily accessible software.
The construction of such a model, REMS, has already been undertaken in the framework of the Convention. REMS will differ significantly from MOISEES, and will have a number of features, including the following:
- It will be a quarterly model, whose objective will be not so much in the short term as in the medium and long term.
- The model will have solid microeconomic foundations as it will consist of a set of approximately forty equations that will be built up through a process of inter-temporal optimisation, which will make its behaviour transparent and facilitate the interpretation of the results.
- The REMS will be forward-looking, which means that agents' expectations about the future evolution of macroeconomic variables may condition the present situation of the economy.
- As in most modern macroeconomic models, Rems will rely on the assumption of rational expectations with perfect foresight.
- Despite its interest in the medium and long run, the Rems will introduce different types of rigidities that will move it away from a purely neoclassical view of the economy, with perfect competition and equilibrium in goods and factor markets. In particular, three types of inflexibilities will be considered in the model. First, there will be frictions in the labour market caused by the fact that the matching process between job offers and demands is costly, which explains the existence of unemployment. Second, there will also be rigidities in the investment function, captured by the existence of adjustment costs of capital. Finally, the model will incorporate rigidities in the supply of products, caused by the existence of a set of firms that, acting under monopolistic competition, are reluctant to change the price of their products in the short run.
- The model will use statistical inference to adjust the value of the parameters to the characteristics of the Spanish economy. In particular, the parameters will be estimated by the generalised method of moments (GMM) from a specially constructed database for the relevant variables.
- The estimation and simulation process will be fully automated, so that the model will be easily adaptable to the latest statistical information available. Thus, for example, by incorporating the latest economic data into the database, the model will automatically re-estimate the parameters and obtain the simulations conditioned to the new value of the parameters.
The model will make it possible to study the consequences of a wide range of policy measures, permanent or transitory and realised or expected. To this end, the model will obtain the long-run solution, or steady state, before and after the change in the policy parameter, as well as the transition path between the two steady states, thus providing information on the speed at which changes in the variables of interest occur.
In particular, the design of the model will make it particularly suitable for studying the effects of fiscal policy (with a high degree of detail on tax rates), monetary policy, energy policy, labour policy and trade policy.