CoPS/IMPACT Working Paper Number OP-37

Title: Modelling the effects of economy-wide shocks on a state economy in a federal system - A hybrid of the top-down and bottom-up approaches to regional modelling

Authors: Peter J. Higgs, B.R. Parmenter and Russell J. Rimmer


This paper describes a method for introducing more regional detail into an applied general equilibrium model than is available from the top-down approach to disaggregation. Recognizing that the complete set of inter-regional accounts is rarely available, the method described uses available data for one or more regions of interest for which the demand patterns and/or the input structures of certain industries are known not to be a close reflection of the national averages for these industries.

The method splits these national industries into the part(s) located in the region(s) of interest for which detailed data are available, and the remainder. The new regionally specific industries are then treated just like any other aggregate industry recognized at the national level (but of course, their demand and/or production structures differ). Shocks specific to such regionally specific industries can now be introduced into simulations.

This limited bottom-up disaggregation does not impede the use of the top-down method -- in this paper, the ORANI-LMPST method -- for disaggregating the aggregate national industries. Thus detail in simulations comes both from region-specific information (as in the bottom-up approach), as well as from top-down disaggregation. Because it incorporates more region-specific data, this hybrid method is more reliable than stand-alone use of the top-down approach.

The example detailed in the paper describes the use of the hybrid method to improve disaggregated results for Tasmania (Australia's smallest State) from the ORANI national model of Australia.

JEL classification: C68, R12, R13, R15

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