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Integrated Regional Econometric and Input-Output Modeling

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Integrated Regional Econometric and Input-Output Modeling Integrated Regional Econometric and Input-Output Modeling Sergio J. Rey12 Department of Geography San Diego State University San Diego, CA 92182 [email protected] January 1999 1Part of this research was supported by funding from the San Diego State Uni- versity Foundation Defense Conversion Center, which is gratefully acknowledged. 2This paper is dedicated to the memory of Philip R. Israilevich. Abstract Recent research on integrated econometric+input-output modeling for re- gional economies is reviewed. The motivations for and the alternative method- ological approaches to this type of analysis are examined. Particular atten- tion is given to the issues arising from multiregional linkages and spatial effects in the implementation of these frameworks at the sub-national scale. The linkages between integrated modeling and spatial econometrics are out- lined. Directions for future research on integrated econometric and input- output modeling are identified. Key Words: Regional, integrated, econometric, input-output, multire- gional. Integrated Regional Econometric+Input-Output Modeling 1 1 Introduction Since the inception of the field of regional science some forty years ago, the synthesis of different methodological approaches to the study of a region has been a perennial theme. In his original “Channels of Synthesis” Isard conceptualized a number of ways in which different regional analysis tools and techniques relating to particular subsystems of regions could be inte- grated to achieve a comprehensive modeling framework (Isard et al., 1960). As the field of regional science has developed, the term integrated model has been used in a variety of ways. For some scholars, integrated denotes a model that considers more than a single substantive process in a regional context. Examples include models that combine regional economic compo- nents with environmental or ecological concerns (Briassoulis, 1986; Hafkamp and Nijkamp, 1981) or models that consider demographic and labor market interactions (Ledent and Gordon, 1981; Madden and Batey, 1980). These are referred to as substantively integrated regional models. A second way in which a model can be considered integrated is if it treats multiple spatial scales and/or interacting regions within the same frame- work. Examples of these spatially integrated models include the work by Courbis (1979, 1980, 1982a,b) who developed a spatially hierarchical model for France that considers the interactions between the national, regional and urban scales. More recently, Jin and Wilson (1993) have suggested a multispatial integrated model which emphasizes interactions between urban zones within a larger interregional context. A further example of a spatially integrated model would be one where the interactions between multiple re- gions, at the same scale, are considered within the framework. This could include the so called interregional (IRIO) (Beyers, 1989; Oosterhaven, 1981) and multiple (MRIO) (Shao and Miller, 1990) input-output models as well as multiregional econometric models (Beaumont, 1989; Lienesch and Kort, 1992; Treyz et al., 1992). The final manner in which a model can be considered integrated is if it combines more than a single modeling methodology in the same framework. This has been done in a wide variety of ways such as: extended input- output/demo-economic models (Madden and Batey, 1980); combined linear programing and input-output models (Anselin et al., 1990); optimization and spatial interaction models (Harris, 1988), among others. In a recent update of his conceptualization Isard has identified the in- tegration of econometric and input-output as a new approach to synthesis (Isard et al., 1998). This recognition stems from the recent heightened level of activity on integrated econometric and input-output (EC+IO) model- Integrated Regional Econometric+Input-Output Modeling 2 ing over the last two decades (Anselin and Madden, 1991; Beaumont, 1990; Rey, 1998). This paper presents an overview of recent research on integrat- ing econometric and input-output models at the regional scale. The focus is mainly on efforts in the U.S., with an emphasis on the issues to be faced in the implementation of these frameworks in practice. As such the objectives of this paper are threefold. First, the paper will outline the main approaches that can and have been used to implement EC+IO models in practice. Sec- ondly, a number of outstanding methodological issues associated with this type of modeling at the regional scale are discussed. Finally, a number of promising directions for future research are highlighted. Given these objec- tives, the paper is intended for regional analysts who may be considering the development of such models for their own regions, as well as for theo- retical and applied regional modelers interested in recent developments in integrated EC+IO modeling. In the following sections of the paper, I first discuss the motivations for integrated EC+IO modeling at the regional scale, where the focus is on both theoretical and practical concerns. Next, the different approaches that have been taken towards the implementation of integrated models are reviewed, with attention given to the relative merits of the alternative approaches. This is followed by the identification of a number of issues that arise in inte- grated modeling at the regional scale that are distinct from national efforts in that they are associated with multiregional linkages and other spatial issues. I then outline a series of promising new directions in integrated modeling, and I close with some more general remarks. 2 Motivations for Integrated Modeling Given the wide variety of regional economic models that are available, it is important to properly situate integrated EC+IO within this larger field. EC+IO models can be viewed in a variety of ways. For example, some schol- ars (West and Jensen, 1995) see a competition arising between the EC+IO models and regional computable general equilibrium models (CGE),1 while others have tended to stress the similarity between EC+IO and CGE mod- els (Treyz, 1993). Even within the field of EC+IO modeling there is some debate about the distinctions between the integrated EC+IO model and its individual components (i.e., EC and IO) (Beaumont, 1990). Therefore, as a way of trying to situate EC+IO models it is useful to focus on the mo- 1For an excellent survey of recent work on regional CGE models see Partridge and Rickman (1999) Integrated Regional Econometric+Input-Output Modeling 3 Table 1: Comparative Characteristics of IO, EC and IO+EC Models Characteristic IO EC EC+IO √ √ Dynamic √ √ Disaggregate √ √ Price Responsive √ √ √ Impact Analysis √ √ √ Demand Driven √ √ Forecasting √ Inferential √ √ ? Multiregional ? tivations for this type of modeling, which are of two types: theoretical and practical. 2.1 Theoretical Motivations for EC+IO Modeling One of the main theoretical motivations for implementing EC+IO models largely stems from the restrictive assumptions of each component model (i.e, EC or IO) when used in isolation. To illustrate the key assumptions, Table 1 summarizes the characteristics of the econometric and input-output models, as well as those characteristics that are inherited by the integrated framework. During the early development of the field of regional science the classic regional IO model became a mainstay of the analyst’s toolkit. Yet with this widespread application came a growing awareness of the limitations of the behavioral representation offered by IO models. Chief among these were the assumptions of linear production technologies; constant returns to scale; homogeneous consumption functions; and price inflexibility. Compared to IO models, regional EC models have historically not en- joyed the same level of popularity. This is explained, in part, by the more extensive data and calibration requirements of these models. Moreover, from a theoretical perspective, the modeler is additionally responsible for spec- ification of the underlying theory, in contrast to the case for an IO model where the theoretical basis is inseparable from the framework. While both IO and EC models are macroeconomic in nature, a crucial difference between these models pertains to their respective views of regional economies. IO models are essentially general equilibrium in nature in the Integrated Regional Econometric+Input-Output Modeling 4 sense that the markets clear. This occurs through supply adjustments to demand shocks, while prices play no role in the market response. On the other hand, regional EC models often depict regional economies in a partial and/or disequilibrium context, where the focus is typically on the dynamic adjustment path of the economy to exogenous shocks. However, despite this fundamental theoretical difference between the IO and EC models, both are essentially demand driven when applied at the regional scale (Beaumont, 1990). Some of the theoretical differences have served as key motivations for combining IO and EC models. Specifically, the lack of price responsiveness in IO models has been the focus behind many integrated IO+EC models. Because this price rigidity is present throughout the IO model there have been multiple channels of integration between the EC and IO components. Table 2 shows the input-output accounts for a single region, with n indus- tries, which provides the context to view these channels. Central to the integration of the IO and EC models is the following identity:2 X = AX + Y (1) where X is an n by 1 vector of industry output, Y is an n by 1 vector of final demands and A is an n by n regional input-output coefficients matrix with a typical element: xij aij = . (2) Xi It is important to emphasize the role of aggregation in the integration. At the macroeconomic level, there are m elements of aggregate final demand: personal consumption C; investment I; government expenditures G; and net exports (NE = Exports − Imports). Each of these aggregate components is obtained as the sum of the industry specific values, for example: Xn C = Ci (3) i=1 and total gross regional product is: Y = C + I + G + NE. (4) One of the more common channels of integration has focused on personal consumption C.
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