The distributive effects of inflation stabilization policies in Brazil: A CGE modeling approach
Simpson, Murray S.
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Permalink
https://hdl.handle.net/2142/22883
Description
Title
The distributive effects of inflation stabilization policies in Brazil: A CGE modeling approach
Author(s)
Simpson, Murray S.
Issue Date
1994
Doctoral Committee Chair(s)
Baer, Werner W.
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Language
eng
Abstract
The purpose of this dissertation is to construct an economywide simulation model of Brazil which serves as a tool to quantify the effects of alternative inflation stabilization policies on the distribution of income. The model includes five household classes, five production sectors, four types of labor, the public sector, and the rest of the world. Microeconomic optimizing behavior is captured by means of a multisector computable general equilibrium (CGE) submodel. Macroeconomic relationships are modeled through the money market, the loanable funds market, and the current account of the balance of payments.
The model integrates both micro and macro elements in a general equilibrium framework. A CGE submodel of product and factor markets calculates relative sectoral prices, sectoral output, factor payments, and the distribution of factor income. Likewise, it generates deficits and surpluses of savings relative to investment for households, firms, and the public sector which feed into demands and supplies of loanable funds and a determination of the domestic interest rate in the loanable funds market. A money market endogenously determines the price level while a balance-of-payments identity regulates foreign savings and foreign capital inflows. Expectations of inflation are formed in an adaptive manner which is consistent with the wage and financial indexation rules employed in Brazil during the time period being studied. The entire system is iteratively solved for a temporary equilibrium. An intertemporal, dynamic adjustment submodel then takes over to update important exogenous variables and move the system to another temporary equilibrium solution. The end result is a series of temporary equilibria.
A 1975 social accounting matrix (SAM) of Brazil serves as the data base for an empirical version of the model. Counterfactual policy simulations run over five periods yield orders of magnitude about the effects of different inflation stabilization policies on income distribution. They also provide quantitative assessments of the effects of such policies on sectoral output, sectoral terms of trade, government budget balance, foreign trade balance, and the rate of inflation. The simulations reveal that assumptions about commodity pricing behavior (markup pricing or competitive pricing) and factor pricing behavior (wage indexing or no wage indexing) have important distributive implications.
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