FEDERAL : a two-region multisectoral fiscal model of the Australian economy

This thesis is concerned with the construction and testing of a two-region computable general equilibrium (CGE) model. The model, entitled FEDERAL, is designed to allow detailed analysis of regional and national economic shocks within a federal economic system. Although containing some Australian institutional features, FEDERAL's theory could easily be adapted to another market-oriented economy which has a federal system. The first chapter of the thesis outlines previous work in CGE regional modelling while Chapter 2 develops FEDERAL's theoretical structure, using the well-known ORANI model - as described in Dixon, Parmenter, Sutton and Vincent (1982) - as its starting point. The principal new features of FEDERAL are: it is a multi-regional model it contains extensive modelling of two tiers of government finance (i.e. Commonwealth and State) it contains detailed modelling of regional income. The multi-regional form of FEDERAL adds a new layer of complexity as compared with ORANI. This is particularly the case with the modelling of margin industries (trade, transport and insurance). FEDERAL carries this detailed area of ORANI into full multi-regional complexity by modelling the provision of margin services supplied on the flow of each individual commodity in intraregional, interregional and international trade by each region of margin supply. The modelling of two tiers of government introduces a vast array of Commonwealth and state taxes and subsidies affecting the decisions of economic agents in each region. FEDERAL also models in detail current and capital expenditure by governments, transfers to persons, intergovernmental transfers and, via a set of receipts and outlays accounts, the three governments' borrowing requirements. A feature of the modelling of regional disposable income is the track kept of foreign and interregional ownership of capital in each regional industry. The third chapter outlines FEDERAL's data-base while Chapter 4 looks at the construction of the data-base for the 9-industry implemented version - the two regions being Tasmania, the state of interest, and mainland Australia. Techniques are devised to individually estimate each of the required 115 input-output data matrices. Chapter 5 discusses testing the model's homogeneity properties and analyses the results of some illustrative simulations examining the effects of national (tariff) and regional (payroll tax) shocks. The results of these simulations are used to draw out key features of the model's structure. The final chapter provides a brief overview and considers future research - both in terms of model applications and possible areas of improvement in the model's structure.