Spatial economic dynamics and transport project appraisal

October 17, 2022

By James Lennox

Transport infrastructure is costly to build and very long-lived. Major projects are expected to enhance accessibility, which over time, is likely to affect the distribution of population and employment. In a Dynamic Spatial Equilibrium (DSE) model, the timing and location of a project’s direct costs and benefits can be explicitly represented. Effects of both construction and operational phases are captured in a forward-looking spatial general equilibrium with costly adjustment. Not only are dynamic responses of direct interest to policymakers, but they have crucial implications for welfare analysis. In this paper, we present a flexible DSE model incorporating dynamics of internal migration and occupation choice, and intra- period spatial linkages via commuting and trade flows. We calibrate the framework to Australian data and illustrate its application by modelling a hypothetical fast express rail service in South-East Queensland. In analysing the results, we highlight the roles of general equilibrium effects within and between periods. These are important both to overall welfare benefits and to their distribution. Transport cost changes are exogenous inputs to our simulation. However, we also discuss the potential to link a DSE model to a four-step strategic transport model to enable fully dynamic Land Use-Transport Interactions (LUTI) simulations.

Is this the next dimension into which DSGE models will evolve? I highlights a few space models before, which had direct relevance to topics that DSGE modelers cared about. Here, we are venturing further away, a area that space modelers are familiar with but now using some DSGE techniques.


The optimal quantity of CBDC in a bank-based economy

October 16, 2022

By Lorenzo Burlon, Carlos Montes-Galdón, Manuel Muñoz and Frank Smets

We provide evidence on the estimated effects of digital euro news on bank valuations and lending and find that they depend on deposit reliance and design features aimed at calibrating the quantity of CBDC. Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e., central bank collateral requirements and imperfect substitutability across CBDC, cash and deposits), the issuance of CBDC yields non-trivial trade-offs and effects through an expansion of the central bank balance sheet and profits. The issuance of CBDC exerts a smoothing effect on lending and real GDP by stabilizing deposit holdings. Such “stabilization effect” improves the well-known liquidity services/disintermediation trade-off induced by CBDC and permits to rank different types of CBDC rules according to individual and social preferences. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains.

Central Bank Digital Currencies (CBDC) are often presented as a response of central banks to cryptocurrencies. That is wrong. First CBDC do not need to be on a blockchain, as the central bank manages its ownership. Second, its value can be managed by monetary policy. This means that it has many commonalities with non-digital money, but, as this paper shows, CBDC also has a few properties that make it a valuable addition to the portfolio of assets the public can use.