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Guidelines for using models in the paper
The principle problem to be addressed in the paper is the effect of the globalization on the poverty and
income distribution. To measure that effect, one logically needs a counterfactual, that is, an account of what
would not have happened if the current and capital liberalization had not been liberalized.
The first objective is to identify what effects globalization has had on your economy. These might include:
• A rising share of imports plus exports divided by GDP. This index should be shown in a table or graph
and the date of liberalization of the current account identified.
• This date usually corresponds to a reduction in tariffs. This also should be documented.
• The date of capital account liberalization is not the same. Many countries have sequenced capital
account liberalization, that is, introduced it more slowly than current account liberalization.
• If the country has lifted capital controls, the date should be indicated.
• Foreign investment, both portfolio and direct foreign investment, should have increased with capital
account liberalization.
• The first step is to calibrate you models, both Keynesian and Solow to the actual data of the country.
• Figure 1 shows the performance of the model for years 1990 to 2000. Parameters must be adjusted to
make the model perform as best as can be done.
140
120
100
80
Sim
Actual
CF
60
40
20
0
1988
1990
1992
1994
1996
Figure 1: Real GDP (base year 1990)
1
1998
2000
• Inflation should match in the same way, but this is often more difficult. Figure 2 indicates how well
the model captures actual inflation.
0.12
0.1
0.08
0.06
0.04
0.02
Sim
Actual
CF
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 2: Inflation
• Graphs of tables for the fiscal and foreign deficits should also be indicated and should look like figures
3 and 4.
• The above should be able to convince the reader that the model adequately captures the recent history
of the country.
• Report in a table the key parameter changes that were needed to calibrate the model. In the same
table indicate the changes necessary to calibrate the model to the counter factual. Here is an example
• Once you have done this you should then graph or construct a table with the following:
• Gini Here we have no data for actual or if we do it is spotty.
• The same for poverty head count as shown in figure 6 and the poverty gap as shown in figure 7
• Now it is obvious that counterfactual simulation has an infeasible level of government deficit over GDP.
What would happen if you lowered G or raised taxes until the deficit did not increase above say 6
percent of GDP? What then would happen to poverty?
2
0.14
0.12
0.10
0.08
0.06
0.04
0.02
Sim
Actual
CF
0.00
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 3: Current Govt Deficit / Y
Table 1: Parameter settings
G
Tr
T r∗
ws
wu
en
I¯
Ms
(dI/I)/di
(dM d/M d)/di
tˆ∗
Base
Simulation
0.01
0.01
0.05
0.05
0.01
0.07
0.03
0.03
3.5
-3
2
-0.1
Counter
factual
0.04
0.03
0.01
0.08
0.02
0.02
0.025
0.02
2.2
-2
2
0
Source: Author’s computations
3
0.900
0.800
0.700
0.600
0.500
0.400
0.300
0.200
Sim
Actual
CF
0.100
0.000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 4: Current Account Deficit / Y
4
0.305
0.300
0.295
0.290
0.285
Sim
0.280
CF
0.275
0.270
0.265
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 5: Gini
5
64
62
60
Sim
CF
58
56
54
52
1988
1990
1992
1994
1996
Figure 6: Poverty Head Count
6
1998
2000
3.00
2.50
2.00
Sim
CF
1.50
1.00
0.50
0.00
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 7: Poverty Gap
7
140
120
100
80
Sim
Actual
CF
60
40
20
0
1988
1990
1992
1994
1996
1998
Figure 8: Lowering the growth of Government Expenditure
8
2000
• Figure 8 shows the effect of lowering the growth of government spending to 2 percent so that the fiscal
deficit remains below 6 percent of GDP. As a result GDP falls as shown.
• The employment is also less as shown in figure 9.
20.00
19.00
Sim
"CF with high G"
"CF with low G"
18.00
17.00
16.00
15.00
14.00
13.00
12.00
11.00
10.00
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Figure 9: Employment with two levels of govt spending
• With globalization labor gets less and profits rise. We can now use a Solow model to see if this trade
off is worthwhile. If low consumption on the part of labor now leads to higher consumption later, the
globalized economy might ultimately lead to higher incomes and a better distribution of income.
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