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Abstract
AUTHOR S
Devrim Yilmaz Agence Française de Développement Paris (France)
Kadir Has University Istanbul (Turquie)
Sawsen Ben-Nasr Institut Tunisien de la Compétitivité et des Etudes Quantitatives Tunis (Tunisie)
Achilleas Mantes Agence Française de Développement Paris (France)
Nihed Ben-Khalifa Laboratory of Economics and Industrial Management (LEGI), Polytechnic School of Tunisia, University of Carthage Tunis (Tunisia)
Issam Daghari Institut National Agronomique de Tunisie Tunis (Tunisie)
Using an empirical, multisectoral, open economy, StockFlow Consistent model, this paper assesses the long-term consequences of a sustained climate-induced decline in agricultural production for the Tunisian economy. Focus is placed on agricultural and processed food production and the feedback loops of balance sheet and liquidity effects on the real economy. The model is empirically calibrated using a range of national accounts, input-output, balance of payments and balance sheet datasets, agricultural projections from crop models and it is simulated for the period 20182050. We show that costs of inaction in the face of declining agricultural production are dire for Tunisia. We find that the economy will face high and rising unemployment and inflation, growing internal and external macroeconomic imbalances and a looming balance of payments crisis, especially if global food inflation remains high in the coming decades. We then simulate two possible adaptation scenarios envisaged by policymakers and show that adaptation investments in water resources, increased water efficiency in production and a public, investment driven big push, can put the economy back on a sustainable path in the long run.
Keywords
We are grateful to Antoine Godin for his valuable comments on earlier drafts of this paper. All errors remain ours.
Original version
English Accepted June 2023
Antoine Godin (AFD)
Devrim Yilmaz (AFD)
Ecological macroeconomics, Climate change, Stock-flow consistent modelling, Open economy macroeconomics
En utilisant un modèle Stock-Flux Cohérent multisectoriel d’une petite économie ouverte, ce document évalue les répercussions à long terme d’une baisse soutenue de la production agricole due au changement climatique sur l’économie tunisienne. L’accentest mis sur la production agricole et agroalimentaire, ainsi que sur les boucles de rétroaction des effets des bilans et de liquidité sur l’économie réelle. Le modèle est calibré empiriquement en utilisant des données provenant de diverses sources telles que la comptabilité nationale, les tableaux entrées-sorties, la balance des paiements et les bilans bancaires. De plus, il intègre des projections agricoles basées sur des modèles de culture et les simulations sont réalisées pour la période allant de 2018 à 2050. Les résultats montrent que les conséquences de l’inaction face au déclin de la production agricole sont désastreuses pour la Tunisie. L’économie sera confrontée à une augmentation croissante du chômage et de l’inflation, ainsi qu’à des déséquilibres macroéconomiques internes et externes de plus en plus importants et une crise imminente de la balance des paiements, en particulier si l’inflation alimentaire mondiale reste élevée dans les décennies à venir. Par la suite, deux scénarios d’adaptation envisagés par les décideurs politiques sont simulés, démontrant que des investissements d’adaptation dans les ressources en eau, une amélioration de l’efficacité de l’utilisation de l’eau dans la production, et une impulsion majeure d’investissement public peuvent remettre l’économie sur une trajectoire de développement durable à long terme.
Macroéconomie écologique, Changement climatique, Modélisation stock-flux cohérent, Macroéconomie en économie ouverte
Facedwithworseningglobalwarmingconditionsandlimitedwaterresourcesthatarealready belowthethresholdofabsolutewaterscarcity(MinistryofAgriculture,WaterResourcesand FisheriesofTunisia,2020),Tunisiafacesmajorchallengesandrisksthatcouldexacerbatethe country’sdifficulteconomicandsocialsituationinthecomingdecades.Risingtemperatures andanincreaseinthefrequencyofextremeweatherevents,coupledwithadecreasein rainfall,areexpectedtoaffectboththequantityandqualityofwaterresources,andthusthe economy,particularlyagriculture.Whilethishighlevelofwaterstresswillrequirehighlevelsof investmentinadaptationandefficiencygainsinwateruse,Tunisia’sfragilemacroeconomic outlookimpliesthatefficientuseofpublicandprivateresourcesisessentialtoachieve asustainablewaterbalancealongsidethecountry’sdevelopmentgoals(UnitedNations ClimateChange,2022).
Inthiscontext,thispaperaimstomodelthemacroeconomicimpactsofclimatechange andtheviabilityoflong-termadaptationpoliciesinTunisia,usingaStock-Flow-Consistent (SFC)economicmodelandcropyieldprojections.ThemodelpresentedbelowisamultisectoralextensionofYilmazandGodin(2020),whodevelopaprototypegrowthmodelfor developingeconomies.SFCmodellinghasrecentlybeenusedtoanalysethephysicaleffects ofclimatechangeonglobalmacro-financialdevelopmentsandmacrodynamicstability (Dafermosetal., 2017, 2018; Bovarietal., 2018)andtheeconomicconsequencesofrapid energytransitionpaths(Jacquesetal.,2023),highlightingitssuitabilityforouranalysis.Our novelapproachsynthesisesamulti-sectorproductionstructurewiththeSFCframework andthecontinuous-timedynamic,macrofoundationsapproachoftheBielefeldschoolof macroeconomics,developedbyP.Flaschel,C.Chiarellaandco-authors,inparticularwith respecttodynamicdisequilibriumprocesses(ChiarellaandFlaschel,2006;Flaschel,2008; Flascheletal.,2008;Charpeetal.,2011;Chiarellaetal.,2012,2013).Wealsopayparticular attentiontotheimportanceofcapitalinflowsforsmallopeneconomies(Frankel,2010;Borio andDisyatat,2015),suchasTunisia,andthechannelsthroughwhichtheyaffectthedomestic economy,includinginternationaltrade(Blecker,2016),liquidity(Kaminskyetal.,1997)and balancesheeteffects(BernankeandGertler, 1995).Foragriculturalyieldprojections,we useFAOprojectionsaswellasprojectionsfromtheAdaptActionproject(Deandreisetal., 2021).
Thepaperisstructuredasfollows:thenextsectionpresentsthemacroeconomicdevelopmentsinTunisiaoverthelasttwodecades.Sectionthreediscussestheimpactofclimate changeonTunisiathroughtemperatureandprecipitationprojections.Sectionfourpresents theimpactofclimatechangeonagricultureandtheconstructionofagriculturalproduction projections.ThemacroeconomicmodelanditscalibrationtotheTunisianeconomyare presentedinthenexttwosections.Sectionsevenpresentsthesimulationresultsunder theBAUscenario,undertheRCP8.5scenariowithamoderateworldgrowthrateandworld inflation,andundertheRCP8.5scenariowithalowworldgrowthrateandhighworldinflation forfoodimports.Theeighthsectiondiscussesandsimulatestwolong-termadaptation scenariosdefinedbytheTunisianMinistryofAgricultureandsimulatesthemacroeconomic impactofthesepoliciesundertwoalternativescenarios.Thefinalsectionpresentsconcluding remarks.
TheTunisianeconomyisfacingmajorsocioeconomicdifficulties.Growingtwindeficits,slowingeconomicgrowth,depreciationoftheTunisiandinarandpersistentlyhighunemployment andinflationrateshavecharacterisedtheeconomyoverthepastdecades(Nuciforaetal., 2014).Thesestructuralweaknessesarelikelytolimitthecountry’sadaptivecapacityand increaseitseconomicvulnerabilitytoclimatechangeinthemediumandlongterm.
Sincethe2011revolution,Tunisiahasexperiencedparticularlyfragileeconomicconditions duetopoliticalandsocialinstability,whichhasledtoanunfavourablebusinessclimate forinvestmentandhamperedeconomicgrowth.RealGDPgrowthhasslowedsignificantly overthisperiodcomparedwiththepreviousdecade,fromanaverageannualrateof4.6% between2001and2010to1.4%between2011and2019,mainlyduetotheslowdownindomestic andforeignprivateinvestmentandthedeclineinexportdynamism.
Thedeteriorationininternationalfinancialconditions,combinedwiththestructuralweaknessesoftheeconomy,haslargelycontributedtotheworseningofthecountry’sinternaland externalmacroeconomicimbalances.Thetradeandbudgetdeficitshaverisentohistorically highlevels,leadingtogrowingimbalancesinthecurrentaccount,publicfinances,andthe foreignexchangemarket.
Table1:Macroeconomicindicators,source:NationalInstituteofStatistics,CentralBankof Tunisia,andauthors’computations.
Whileweakeconomicgrowthhasallowedonlymarginalgrowthingeneralgovernment resources,publicexpenditurehasrisensharplyduetoincreasesinthepublicwagebilland highersubsidiestokeepfoodandenergypricesincheckinanenvironmentofhighglobal inflationofimportedcommoditiessuchasoilandcereals.Thebudgetdeficithaswidened
rapidlyrisingfrom3.6%in2011to9.7%in2020duringtheCovid19pandemic,seefigure1a.Asa result,publicdebtincreasedsignificantly,reachingover80%ofGDPin2020,mainlydrivenby asharpriseinpublicexternaldebt,whichexceeded50%ofGDPin2020.
Inaddition,thesharpriseinthetradedeficit,mainlyduetothelargedeficitinenergytrade, persistentfooddeficits,andthedeclineintheservicessurplusduetoasharpfallintourism activity,hasledtoawideningofthecurrentaccountdeficit,whichincreasedasapercentage ofGDPfrom-4.8%in2010to-11%in2018,seefigure1b.Before2010,thecountryreliedmainly onFDIinflowstofinanceitscurrentaccountdeficit.Aftertherevolution,FDIdeclinedfrom3.5% ofGDPin2009to1.9%ofGDPin2019.Thus,thelargeandpersistentcurrentaccountdeficit wasonlypartiallycoveredbyFDIandthegovernmentresortedtoexternalborrowing,leading toanaccumulationofexternaldebtandaworseningofcountryrisk(IMF,2019).
Indeed,astheoverallfinancingneedsoftheeconomyhavesteadilyincreased,andthe contributionofthebankingsystemandhouseholdsavingstothisfinancinghasremained limited,externalborrowinghasenabledthefinancingofprivateandpublicdeficitsoverthe lastdecade.Despitelargeinflowsofremittances,whichhaveaveraged4%ofGDPoverthe lastdecade,externaldebtservicingandlargedividendpaymentsbythecorporateand bankingsectorstotherestoftheworldhaveabsorbedallexternalfinancing.Asaresult, netinternationalreserveshavedeclinedsignificantly,fallingtoonly84daysofimportsin 2018.
Duetolowhouseholdincomeandhencelowsavings,depositgrowth,themainsourceofbank financing,didnotfollowloangrowthandthebankingsectorhadtoresorttolargeamounts ofcentralbankfinancing.Liquidityinthesectorremainedbelowinternationalstandards,with liquidassetsnotexceeding20%oftotalassets.Profitabilitywasalsolow,withthereturnon equityaveraging10%between2008and2018,andthenon-performingloanratiowasvery high,averagingat13.3%in2018.(CentralBankofTunisia,2019).
(a)Budgetdeficitandpublicdebt,source:Ministryof Financesandauthors’computations.
(b)Balanceofpayment,source:CentralBankofTunisia andauthors’computations.
Figure1:FiscalBalancesandBalanceofPayments;Source:INS
Characterisedbyanaridtosemi-aridclimateover80%ofitsterritory,Tunisiahasapermanent waterdeficitandremainsthe30thmostwater-stressedcountryintheworld(WRI, 2020). Overthepastdecade,thecountryhasexperiencedtwoperiodsofseveredroughtin2013 and2015-2017,withasignificantriseintemperature,followedbyperiodsofrecurrentheat waves,aswellasfiresandfloods,whichhavemultipliedinrecentyears.Theagricultural sectorisessentiallybasedonrain-fedproduction,whichaccountsformorethan90%of thecultivatedareaand65%ofagriculturalvalueadded.Itisthereforehighlydependent onclimaticvariations(Chebbietal.,2019),asshownbythestrongcorrelationbetweenthe growthrateofagriculturalvalueaddedandrainfallinFigure2b
(a)AveragetemperatureunderRCP4.5andRCP8.5scenarios.Source:NationalInstituteofMeteorology(Climat-c, 2020)
(b)AgricultureValueAddedandrainfall.
Figure2:RecentclimaticconditionsinTunisia;Source:TunisiaNationalInstituteofMeteorology, NationalInstituteofStatisticsandauthor’scomputations.
TheupdatedprojectionsoftheNationalInstituteofMeteorologyin20201 indicateatemperatureincreaseofupto1.8°Cby2050forRCP4.52 andupto3°Cby2100.Tunisia’sinlandregions willexperienceatemperatureincreasecomparedtothecoastalregions.ForRCP8.5,this temperatureincreasewillbeevenmoreacute,reachingthevaluesof2.3°Cand5.2°Cforthe 2050and2100horizons,respectively.Underthusclimateforcing,thearidinlandregionswill experiencemajorheatwaves,threateningalreadyfragileagro-systems.
Withregardtoprecipitation,theclimateprojectionsoftheNationalInstituteofMeteorology showasignificantdecreaseinprecipitationunderthetwoscenarios,withadecreaseof between14and22mmin2050undertheRCP8.5andRCP4.5scenariosrespectively,i.e. alossof-6%and-9%comparedtotheaverageprecipitationobservedovertheperiod 1981-2010.
1Onthebasisof14regionalclimatemodelswithaspatialresolutionofupto12.5km,theNationalInstituteof Meteorologyisassessingtheimpactoffutureclimatechangeontemperatureandprecipitationfortwohorizons, 2050and2100,comparedtothe1961-1990averageunderRCP8.5andRCP4.5,presentedinFigures3aand3b 2InitsFifthAssessmentReport,theIntergovernmentalPanelonClimateChange(IPCC)presentedthemodelling ofgreenhousegasesthroughRepresentativeConcentrationPathway(RCP)scenariosthatincludeapessimistic scenarioRCP8.5,twointermediatescenarios(RCP4.5withastabilizationofemissionsbefore2100atalowleveland RCP6.0withastabilizationofemissionsbefore2100atamediumlevel),andanoptimisticscenarioRCP2.6(IPCC, 2014).
Theclimatescenariosalsopredictasignificantincreaseinclimateextremes,indicatinga longerdurationofheatwavesandahighfrequencyofdroughtsandfloods.Indeed,Tunisia wouldexperienceanincreaseinthenumberofconsecutivemaximumdrydaysonaverage of9.3daysperyearaccordingtoRCP4.5and17.1daysperyearaccordingtoRCP8.5scenario, i.e.anincreaseof11%and19%respectivelycomparedtotheaveragerecordedovertheperiod 1981-2010.
Withthepredictedincreaseintemperatureanddecreaseinrainfall,thelossofagricultural productioninTunisiaislikelytoworseninthecomingdecades.Tunisianagriculturehas alreadyexperiencedtheseverenegativeimpactsofclimatechangeincertainpartsofthe country.Risingsealevelsduetoclimatechangehaveincreasedcoastalerosionandsalinity contaminationofcoastalaquifers(Brahmietal., 2018).Thesecoastalaquifersareused byfarmersforirrigation,whichhasledtothesalinisationofseveralirrigationperimetersin Tunisiaandtheirpermanentloss.Forexample,accordingtoIssametal.(2022),theaquifer ofthecoastaltownofDyiar-Al-HujjejinCapbonhasexperiencedseawaterintrusion.The salinisationoftheaquiferreachedaveryhighelectricalconductivityof15dS/minthe1990s, causingmanylocalfarmerstoabandontheirplotsandwells.Inaddition,salinityhasreduced plantgrowthandwaterquality,resultinginlowercropyieldsandreducedwaterreservesin
livestock.
Asincoastalareas,thevulnerabilityoflandintheinteriorofthecountry,whichisclassifiedas semi-arid/arid,iscompoundedbyadverseclimaticconditionsandunsustainableagricultural practices.InTozeur,wherethelargestoasisfarmingsystemislocated,datecropsareatrisk, sufferingthefullimpactofclimatevariabilityandpoorsurfaceirrigation(Dhaouadietal., 2017).Muchofthelandoccupiedbysmallholdersisonlow-fertilityland,whereinappropriate agriculturalpracticeshaveledtosoilerosionandlossofbiodiversity.Irrigationwithhighly salinewaterhasledtothedegradationoreventotalsterilisationofasignificantproportionof Tunisiansoils(KhawlaandMohamed,2020).Indeed,inTunisia,irrigationwateristhemain sourceofsalinisationinirrigatedareas(Louatietal.,2018).
FutureclimatechangeisexpectedtoraisesealevelsalongtheTunisiancoastlineby30to 50cm,leadingtolossofarablelandandacceleratedsalinisationofgroundwaterincoastal areas.Inaddition,soildegradation,increasedheatwavesanddroughts,andreducedrainfall willleadtoageneraldeclineinyieldsandcultivatedareas,resultinginlossesinagricultural production.
InordertoanalysetheimpactofdecliningagriculturalproductionontheTunisianeconomy, wefirstconstructproductionprojectionsintonnesfortwenty-twodifferentagriculturalcrops underBusinessAsUsual(BAU)andtheRCP8.5scenarioforthe2022-2050timehorizon. Ourcropbasketcoversallagriculturalproduction.InourBAUscenario,weuseprojections fromtheFAO’sGlobalAgro-ecologicalZones(GAZ)model(Fischeretal., 2021)toproject productionlevels.3 Forthemaincerealcrops(durumwheat,softwheatandbarley)andolives, wequantifytheimpactofclimatechangeonharvestedareasandcorrespondingyieldsunder theRCP8.5scenariothroughprojectionsdevelopedundertheAdapt’Actionproject,with theparticipationoftheTunisianMinistryofAgricultureandtheFrenchDevelopmentAgency (Deandreisetal., 2021).FortheremainingcropsnotcoveredbytheAdapt’Actionproject (dates,citrusfruits,tomatoes,potatoes,onions,peppers,livestock,milk,eggs,watermelon, othercerealsandothervegetables&fruits),weuseprojectionsbythe Foodandofthe UnitedNations(2018)undertheStratifiedSocietiesScenario(SSS).
Figure4ashowstheaveragesmoothedgrowthratesofyields(intonnes)ofourcropbasket fortheBAUandRCP8.5scenarios.Asexpected,projectionsundertheRCP8.5scenarioshow significantlossesforthemaincropsgrowninTunisia.Amongcereals,barleyandsoftwheat productionin2050areprojectedtodecreasebyrespectively0.9%and0.2%peryear,while durumwheatisprojectedtoincreasebyonly0.1%over2022-2050period.
Themainexportcommodities,i.e.datesandolives,willalsobeseverelyaffectedbyfurther increasesingroundwatersalinityindeepaquifersinsouthernregions,fordates,andbyloss ofrainfallandincreasedtemperaturesforolives.Accordingtoprojections,datesproduction willdeclineby2%peryearuntil2050,whileoliveproductionwilldeclineby0.5%.Livestock production(cattle,goat,sheep)willalsofallasfeedlossesincrease,leadingalsotolowermilk productionby2050.Thegrowthrateofpoultryproductionwillslowdowntoonly0.2%,which willalsobetherateofgrowthofeggproduction.AccordingtoMedECC(2021),astructural shiftinfisheryresourcesisexpected,withanincreaseinthermophilic,exoticspeciesanda
3Morespecifically,forourBAUscenario,weuseagriculturalproductionprojectionsreportedinthe’ClimateShifter’ socio-economicpathwayprovidedbyFAO,whichcorrespondstotheRCP6.0climatescenario
(a)Cropsaverageannualgrowthrateover2021-2050 forBAUandRCP8.5scenarios.Source: Deandreisetal. (2021);FoodandAgricultureOrganizationoftheUnited Nations(2018)andauthors’computations
(b)Demandcomponentsofdomesticagricultureproduction(involume)underBAUandRCP8.5scenarios.Source: Deandreisetal.(2021);FoodandAgricultureOrganization oftheUnitedNations(2018)andauthors’computations
Figure4:AgriculturalProductionProjections.Source:Author’scalculations
simultaneousdecreaseincurrent,coldaffinityspecies.Soweassumethatfishproduction remainsstableandfixtoits2021value.Insummary,thetotalagriculturalproduction(in addedtonnes)sectorwilldeclinebyanaverageof0.5%peryear.
Inordertousethesevolumeprojectionsinoureconomicmodel,weclassifycropsaccordingto theiruse,usinginformationfromthe2015product-levelsupply-usetable(SUT)foragricultural commodities.Morespecifically,weallocatethesupplyofeachcropintonnestosatisfy threecategoriesofdemand:householdconsumption,intermediateconsumptionbyagroindustry/othersectors,andexports.Wethenuse2017pricesforeachcroptocalculate thevalueofoutputforconsumption,intermediateconsumptionandexportsinconstant prices.
Figure4bshowstheevolutionoftheproductionofagriculturalconsumergoods,intermediate consumptiongoods,andagriculturalandprocessedfoodexportsinconstantpricesunder theBAUandRCP8.5scenarios.5 Allfourproductioncategoriesshowcontinuousandsustained declinesuntil2050.Withagrowingpopulationandincreasingdemandforfood,thisdecline inproductionwillleadtoincreasedfoodimportstomeetdomesticdemand,increased ruralunemploymentandpossiblymigrationtourbanareas.Combinedwiththedecline inagriculturalandagro-industrialexports,Tunisiafacesasignificantlossofvitalforeign exchange,especiallyifglobalfoodpriceinflationishighinthecomingdecades.Inthenext section,wediscussthemainaspectsofalarge-scale,empiricalstock-flow-consistentsystem dynamicsmodeloftheTunisianeconomytocapturetheimplicationsofthesedevelopments forTunisia’smacrodynamicperformance.
4Asdiscussedinthenextsection,exportsofagro-industrialgoodsdependsolelyonprojectedoliveandfish production.Fromtheseprojectionsanexogenousexportpathfortheprocessedfoodisconstructed.
5Notethatthefigureusesactualproductiondatauntil2021andprojectionsfrom2022onwards.Theincreasein theproductionofintermediateagriculturalgoodsbetween2018and2020ismainlyduetohigholiveproductionin 2018and2020andhighdurumwheatproductionin2019.However,thesetrendsarenotmaintainedin2021and2022, whendroughtandheatwaveshaveastrongnegativeimpactonyields
TheGEMMES-Tunisia6 modeldescribestheevolutionoftheTunisianmacroeconomyunder differentclimatechangeandclimateadaptationscenarios.Thetechnicaldescriptionofthe modelwithdetailedequations,informationonthedata,calibrationandsimulationstrategies canbefoundintheAppendix.ThestructureofthemodeliscapturedbytheTransactionFlow Matrix(TFM,Table2)andtheBalanceSheetMatrix(Table3),whichshowthebalancesheet structureofeachsector,andthetransactionsthattakeplaceintheeconomybetweenthe institutionalsectorsrespectively.NotethattheTFMalsorecordsthenetsavingpositionsand thecorrespondingchangesinthefinancialandrealstocksofthemodel.Assetsandinflows areindicatedbya(+)andliabilitiesandoutflowsbya(-).
Themodelhassixinstitutionalsectors:Firms,Households,Banks,Government,CentralBank andtheRestoftheWorld.Thefirmssectorisfurthersubdividedintotheagriculturalsector andthenon-financialcorporations(NFC)sector.Therearefivetypesofcommodities.Three differentagriculturalproductsforhouseholdconsumption,intermediateconsumptionand exportsrespectively,producedbytheagriculturalsector;aprocessedfoodproductproduced bytheNFCsector,whichisusedforintermediateandfinalconsumption,andanon-food productalsoproducedbytheNFCsector,whichisusedforinvestment,intermediateandfinal consumption.Inthiscontext,particularattentionispaidtothemacro-financialconditions affectingproductionandthedevelopmentofinternalandexternalimbalances,including foodandconsumerinflation,unemployment,theaccumulationofprivateandpublicdebt, thedeteriorationofcountryrisk,externaldeficitsandtheaccumulationofforeigndebt,and theassociatedfinancialacceleratoreffectsthatfeedbackintospendingdecisionsinall sectors.
Domesticagriculturalproductionforfinalconsumptiondemand,intermediateconsumption andexportsisgivenbytheprojectedclimateconditionsasdescribedintheprevioussection, andisexogenoustothemodel.Aggregatedomesticdemandforagricultureiscomposedof finalconsumptionandintermediateconsumption.Anyexcessdomesticdemandiscovered byimportstoclearthemarket.Theagriculturalsectorconsumesasintermediateinputs agriculturalgoods,processedfoodgoodsandNFCgoods,infixedproportionsofitstotal production.Similarly,thesectoruseslabourandcapitalinfixedproportions.Employment isdeterminedbytotalproductionandtheconstanttrendinlabourproductivity.The agriculturalsectorismostlyhousehold-ownedandthereforeitgeneratesmixedincomefrom itsproductionactivities,afteraccountingforallthetaxesinproduction,socialcontributions andsubsidies.Giventheexogenousgrowthofproduction,itisassumedthatthesector operatesatafixedcapitaltooutputratio,andinvestmentisalwayscarriedouttoensure thatthecapitalstockissufficientforthegivenproductionpath.Netprofitsaredefinedbythe 6
GEMMESstandsforGeneralMonetaryandMultisectorialMacrodynamicsfortheEcologicalShift.mixedincomeofthesectorfromwhichinterestpaymentsonserviceableloans,insuranceand commissionspaidtothebankingsectorandincometaxestothegovernmentarededucted. Aproportionofnetprofitisretainedtofinanceinvestmentandremainingfinancingneeds arecoveredbynewborrowingfromthebankingsectorindomesticcurrency.
TheNFCsectorproducestwogoods,processedfoodandannon-foodgood,withtwodistinct productionprocesses.Domesticproductionoftheprocessed-foodgoodisdemandedfor finalandintermediateconsumption,andexports.Thenon-foodgoodisfurtherdemanded forinvestmentbyfirmsandhouseholds.Aswithagriculturalproduction,intermediate consumptionfunctionsaregivenbythetechnicalcoefficientsandthelevelofproduction forbothgoods.Thesectoruseslabourandcapitalinfixedproportions,andemploymentis determinedbytotaloutputandlabourproductivity.Duetothedependenceoftheprocessed foodproductiontoagriculturalintermediateinputs,wefurtherassumethatprocessedfood exportsdependonclimaticconditionsandareexogenoustothemodel.Importsofprocessed fooddependontimevaryingimportpropensitiesoutofreallevelsoffinalandintermediate consumption.Theimportpropensitiesgraduallyadjusttotheirtargetlevels,whichdependon relativeprices(takingintoaccountimporttaxes)andrelativeproductivitybetweenTunisia andtherestoftheworld,withdifferentelasticities.
Domesticproductionofthenon-foodgoodissoldforfinalandintermediateconsumption, investmentandexports.Asintheothersectors,fixedproportionsofintermediateinputs,labour andcapitalisassumed.Importsofnon-foodgoodsaredeterminedbydomesticdemand forprivatefinalconsumption,intermediateconsumptionandinvestment,withendogenous importpropensities.Aswithprocessedfoodgoods,importpropensitiesareslow-movingand dependonrelativepricesandrelativeproductivitylevels.Exportsofnon-foodgoodsdepend onforeignGDPwithanendogenouspropensitytoexportthatdependsonrelativepricesand relativeproductivitylevels.
Theprocessedfoodanddurablegoodmarketsarecharacterisedbydisequilibria.Ateach pointintimeandforeachgood,totaldemandisnotnecessarilyequaltototalproduction. NFCfirmsformadaptiveexpectationsonrealexpecteddemandaroundthetrendgrowth ofprocessedfoodandthedurablegoodsales.Thistrendfollowspopulationgrowthrate forprocessedfoodandcapitalaccumulationfornon-foodgood.Excessdemandorsupply isclearedbyinventoryadjustmentsinbothmarkets.NFCfirmshaveadesiredinventory toexpectedsalesratiosforprocessedfoodandnon-foodgoods,whichdeterminedesired inventories.Therefore,totalproductionisbasednotonlyonexpecteddemand,butalsoto attaindesiredinventorylevels.
Theproductivesectorchargesarangeofdifferentprices.Themodeldistinguishesbetween producerpricesandusageprices,i.e.intermediateconsumption,finalconsumptionand investment,bythetypeofgood,i.e.agricultural,processed-foodandnon-foodgood.Itfurther distinguishescommodityspecificinternationalimportandexportprices.Firmssettarget producerpricesbasedonamarkupoverhistoricalunitcostsandgraduallyadjusttothese targets,witharelaxationspeedinverselyproportionaltonominalrigidity,capturingprice inertia.Then,thedifferentcompositeusagepricesfollowproducerprices,afterconsidering alltherelevanttaxes,subsidiesandmargins,andaccountingfortheimportsharesof intermediateandfinalconsumption,andthecorrespondingeffectsofworldpricesand thenominalexchangerate.Theagriculturalmarkupisfixed.Themarkupsonprocessedfood andnon-foodgoodsdependnegativelyonthedivergencebetweentheactualandadesired inventorytooutputratios.Thus,asunwantedinventoriesaccumulate,producersreducethe mark-ups(andviceversa).Notethatbyseparatelytrackingdownthedifferentprices,the modelcomputesfoodinflationandalsohouseholdCPIinflationthroughaCPIindex,which dependsontheconsumerpricesofeachproductandtheircorresponding,time-varying relativesharesintheconsumptionbundleofhouseholds.
Asstatedabove,theagriculturalsector’sinvestmentisdeterminedbytheconstantcapital tooutputratioandtheexogenous,climatedependent,productiontrajectory.NFCfirms’ investmentdecisionsdependonsectoralprofitability,whichiscapturedbytherealrate ofprofit.Themodeltracksdownexplicitlytheformationofgrossoperatingsurplusfrom bothprocessedfoodandnon-foodgoodproductionprocesses,includingthegood-specific margins,subsidiesandtaxesonproduction7.Grossprofitsaredefinedafterconsideringthe interestreceivedontheirdeposits,interestpaidontheirserviceabledomesticandforeign currencyloans,insuranceandcommissionsthatfirmspaytothebankingsector.Netprofits istheresidualafterfirmspaycorporatetaxes.Netofinflation,netprofitsformtheprofitability ofthesector.Then,firmsdistributepartoftheprofittodomesticandforeigninvestorsas dividends.
7Inreality,partofproductiontakesplaceinhouseholdsandthereforehouseholdproducersalsogenerategross operatingsurplus.Themodelassumesthatallproductiontakesplaceinfirms.Inorderthentomatchempirically thenationalaccountsandespeciallythesectoralsavingpositions,aproportionofthegrossoperatingsurplusthatis generatedbyfirmsisdistributedtohouseholds,whichisthentaxedbythegovernmentalongsidetheirothersources ofincome.
Firmsfinanceinvestmentthroughretainedearningsandexternalfinance.Theyfurtherrequire fundingtokeepdepositsinbothdomesticandforeigncurrenciesforworkingcapital.Firms desiretofinanceaconstantproportionoftheirtotalfinancingneedsthroughFXdenominated loans.Themodelassumesthatcreditprovisioninforeigncurrencyisrationed,andonlya fractionofthedesiredcreditisprovidedbythebankingsectorinFX.Theremainingfinancing needsaresatisfiedthroughcreditprovisioninginthedomesticcurrency.
Asmentionedabove,banksholdsavingandcurrentaccountdeposits,provideforeignand domesticcurrencyloans,provideinsurancetocompaniesandreceivecommissionsfortheir services.Theyalsoholdgovernmentbondsascollateral.Akeyvariabledeterminingthe availabilityofcreditandtheliquidityoftheFXloanmarketiscountryrisk.Indeed,boththe rationingofcreditvolumeandtheinterestrateschargedonFXloansdependoncountryrisk. Inturn,thecountryriskisaconvexfunctionofthecountry’sinternationalinvestmentposition (ignoringforeign-ownedequityofdomesticfirms),highlightingthesensitivityofsmallopen economiessuchasTunisiatotheperceivedsustainabilityoftheexternaldebtbyinternational investors.
Thecostofforeigncurrencydenominatedprivatedebtdependsonapremiumovertheworld interestrateandisaconvexfunctionofthecountryrisk.Thetargetinterestratethatbanks payondepositsisdeterminedbyamarkdownfromthepolicyratesetbythecentralbank. Themarkdown,inturn,dependsontheliquidityneedsofthebankingsector,andincreases asthebankingsector’sassetsideofthebalancesheetexpandsrelativetoliquidityneeds, capturedbythethebank’sassets-to-advancesratio.Inaddition,thedomestictargetlending ratedependsonthedomesticpremiumovertheaveragecostoffundingforbanks.The domesticpremiuminturndependsontheratioofdebttogrossoperatingsurplusofthe NFCsector.Iftheprivatedebtburdenishighrelativetotheprofitabilityofthesector’smain economicactivity,bankswillraisetheinterestratetocompensateforahigherperceivedrisk ofdefault.Forsimplicity,itisassumedthatthelendinginterestratechargedtohouseholdsis aconstantmarkupoverthelendingratechargedtofirms.Actualeffectiveratesgradually adjusttotargetswithrelaxationspeedsthatdependontheinverseoftheaveragematurity ofloans/deposits.
Banksmakeprofitsfromtheinteresttheyreceiveonserviceableloansfromtheprivatesector, couponpaymentsongovernmentbonds,commissionsandinsurance,afterdeducting theirfundingcosts,i.e.interestpaidonsavingdepositsandadvances,wagesandsalaries ofpersonsemployedinthebankingsector,employers’socialcontributions,intermediate consumptionandothertransferstothegovernment.Wealsoassumethatinsuranceservices totheproductivesectorsoftheeconomyareconstantproportionsofthenominalvalueofthe capitalstockineachsector.Itisalsoassumedthatcommissionsareproportionaltothetotal debtoftheprivatesector,includinghouseholds.Asinothersectors,grossprofitsaretaxed bythegovernment.Partofnetprofitsisdistributedtodomesticandforeignshareholders throughdividends,andtheretainedearningsincreasebanks’ownfundstosatisfyariskweightedtargetcapitalratio(BankforInternationalSettlements,2017).Notethatafraction ofagriculturalloans,mortgagesandcorporateloansisnon-performing(NPLs).Thelower thelevelofeconomicactivity,asmeasuredbyunemploymentandrealGDPgrowth,the higheristheproportionofNPLs.InflationtendstoreducetheamountofNPLs,ashigher nominalincomesmakeiteasiertomeetpaymentobligations.Finally,ahigherreturnon equityallowsbankstofinancelessriskyinvestmentprojects,therebyreducingthelikelihoodof
non-performingloans(MessaiandJouini,2013;Abidetal.,2014;RomdhaneandKenzari,2020). Notethatemploymentinthebankingsectorisaconstantfractionofactivepopulation.
Inreality,banksreceiveinterestonserviceableloansandpayinterestonsavingsdeposits, asrecordedintheTFM 2.Notehowever,thatinthenationalaccounts,theoutputofthe financialsectorincludesfinancialintermediationservicesindirectlymeasured(FISIM).FISIMis anaccountingconventionthataimstocapturefinancialintermediationanddividesinterest paymentsasfollows.Anamountthatcorrespondstotheinterestchargedbybanksfor providingloanablefundstoinvestors,calculatedastheinterestpaymentsresultingfroma ratespreadbetweenthelendingrateandthereference(policy)rate,plusanamountthat correspondstotheinterestbankspaytosavers,calculatedastheinterestpaymentsfroma ratespreadbetweenthedepositrateandthereferencerate.Putsimply,ifcreditoperated throughaloanablefundsmarketandifsavingsandinvestmentequilibratedthroughthe naturalrate,FISIMwouldcorrespondtowhatbankswouldcharge(markup)toinvestors pluswhatbankswouldretainfromsavers(markdown),overthenaturalrateofinterest. NationalaccountsthenproceedbydistributingFISIMasfinalandintermediateconsumption offinancialservicesbynon-financialcorporationsandhouseholdsandtreatitasgrossvalue addedfromfinancialintermediation.TheremaininginterestpaymentsnotrecordedasFISIM, i.e.interestpaidondepositsandreceivedonloans,calculatedusingthereferencerate,is thenrecordedundertheprimarydistributionofincomeaccounts8 .
However,itiswellestablishedthatbanksdonotactasintermediariesinaloanablefunds marketwhenprovidingdomesticcurrencyloans(McLeayetal.,2014).Indeed,becauseofthe model’sendogenousmoneyframework,thereisnoreasontotreatbanksasintermediaries. WethereforeconsideralltheFISIMrecordedinthenationalaccountsasamarginoninterest ratesandshiftittointerestpayments.Consequently,thegrossoperatingsurplusandthe valueaddedgeneratedbythebankingsectordifferfromthenationalaccountsandtherefore arenotreported,andnominalGDPismeasuredonlythroughfinalexpenditure.Sincewetreat thebankingsectorasanon-productivesector,weunderestimatenominalGDPbyanamount equaltoFISIMpaidtohouseholdspluscommissionsandinsurancecostsofhouseholds 9.In orderthentomatchempiricallythenominalGDP,weaddtofinalexpendituresthemissing financialconsumption,i.e.insuranceservicesandcommissionspaidbyhouseholdsand householdFISIM(seeequation267and268intheAppendix).
Thegovernmentprovidespublicservicesbyemployingaconstantproportionofthetotal populationaspublicservants.Italsoinvestsinpubliccapitalataconstantrate,andinadaptation(irrigationmainlyaswewilldiscussbelow)dependingontheclimatechangescenario simulated.Totalgovernmentoutputisthereforecomposedofthelabourcostsofgovernment employees,totalpublicintermediateconsumption,employer’ssocialcontributionspaidby thegovernmentanddepreciationofpubliccapital,asinSystemofNationalAccounts(SNA). Governmentalsoprovidessocialbenefitsandwelfareprogrammes,whichareassumedto bepro-cyclical,dependingontheunemploymentlevelandtheaverageprivatewagelevel. Totalpublicexpenditureisgivenbythesumofpublicemployees’wagesandemployer’s socialcontributions,intermediateconsumptioninputs,socialbenefits,investmentinpublic capitalandadaptation,andinterestpaidonoutstandingpublicdebt.
Governmentrevenueisdeterminedbythesumofemployers’socialcontributions,workers’
8See(ZezzaandZezza,2019)forasimilardiscussion.
9TheFISIMthataccruestoNFCsandthecommissionandinsuranceservicesconsumedbyNFCsincreasethe grossvalueaddedofbanksbythesameamountthattheyreducethegrossvalueoffirmssotheydonotneedtobe addedtothenominalGDPcalculationsfromthedemandside.
socialcontributions,VATinthethreegoodsoftheeconomy,importtaxes,taxesonproduction andothertaxesonproducts,dividendsfrompublicenterprises,centralbankprofits,and incometaxes.Thepublicdeficitisfinancedbyborrowing.First,thegovernmentborrows partofitstotalfinancingneedsasforeigncurrency(FX)denominatedloansataconstant proportionofthetradedeficit10,andtheremainingneedsarefinancedbydomesticcurrency bonds.Itisassumedthattheinterestrateonforeigncurrencypublicbondsdependsonthe countryrisk,whiletheinterestrateonthedomesticcurrencybondsdependsontheratioof publicdebttoGDPandCPIinflation.
Aswiththebankingsector,wetreatthepublicsectorasanon-productivesector.This meansthatproduction,andhencefinalandintermediateconsumptionofpublicservices asmeasuredbytheNSAframework,isnotexplicitlytrackedintheTFM.Therefore,inorder totracknominalGDP,weaddtofinalexpenditurethenominaldepreciationofthepublic capitalstock,theemployer’ssocialcontributionspaidbygovernment,publicwagesand government’sintermediateconsumptiontoaccountfortheproductionandthereforefinal consumptionofpublicservices.
Thecentralbankfollowsapureinflation-ratgetingTaylorrulewhensettingthepolicyrate andactsaslenderoflastresorttothebanks,providingliquiditytothebankingsectoron demandthroughcentralbankadvances.Italsobuysafixedfractionofpublicbondsateach pointintime.Anyprofitsmadebythecentralbankaredistributedtothegovernment.
Employmentinthemodelisdemanddrivenbymarketconditions,andpartlysupplyconstrained,byclimatechange.Asexplainedabove,employmentintheagriculturalsectoris drivenbyclimatechange,andacomponentofdemandforprocessedfood,i.e.exports,is alsodirectlyaffectedbyclimatechange.Fortherestoftheproductiveactivities,expected salesdetermineproductionandthereforeemployment.
Themodeldoesnotidentifydistinctsocialclasseswithinthehouseholdsector.However, tocapturethedifferentpositionsinthesystemofproduction,wedistinguishbetweentwo sourcesofincome.First,householdsearnnetdisposablewageandproductionincomefrom theemployedpersonsintheprivateandpublicsectors,afterconsideringtheincometaxes, socialbenefitsandworkers’socialcontributions.Second,householdsearnnetfinancial incomeintheformofdividendsandprofitsfromtheproductiveandbankingsectors,interest incomeonsavingsandcurrentdepositsandremittancesfromtherestoftheworld.Non-wage incomeisnetofinterestpaidonserviceablehouseholddebt,commissionsandinsurance paidtobanks.
Inallthesectors,i.e.agriculture,NFCs,banksandgovernment,nominalwagesarefully indexedtoinflationandproductivitygrowth,keepingrealwagesconstant.
Householdshaveatargetlevelofnominalconsumption,whichdependsonatime-varying marginalpropensitytoconsumeoutofnominalincome;thepropensityisanegativefunction oftherealdepositrateashouseholdshaveanincentivetosavemorewhenthedeposit
10Thedecisiononwhatproportionofnewdebtwillbeinforeigncurrencydependsonanumberoffactorsand considerations,suchasarbitrageopportunities,riskmanagementandotherpolicyobjectives.Wedisregardthese considerationsinthislong-runmodelanduseafixedratioforpublicFXborrowingtothetradedeficit
rateishigher.Actualconsumptionadjustsgraduallytoitstarget,witharelaxationspeed thatcaptureshabitformation.Oncetotalconsumptionisdetermined,householdsallocate theirincomebetweenagriculture,processedfoodandthenon-foodgoodthroughalinear expendituresystem(LES)asinLluch(1973).However,withfixedmarginalbudgetshares,LES violatesEngel’slawthatmarginalincomeelasticitiesoffoodmustdecreasewithgrowing income(seeHoetal.(2020)).We,therefore,assumethatthemarginalbudgetsharesof agriculturalandprocessedfoodarenegativefunctionsofrealconsumption.Householdsalso haveatargetinvestmentinhousing,definedasafractionoftheirtotalnetdisposableincome, andactualhouseholdinvestmentgraduallyadjuststothistarget.Aconstantproportionis financedthroughbankinglendingandtherestthroughthenetdisposableincome.
Householdsdistributetheirsavingsinforeigncurrencydeposits,savingandcurrentaccount depositsindomesticcurrencyandgovernmentbonds.Foreigncurrencydepositsarea shareoftotalremittancesreceivedfromabroadandcurrentaccountdepositsareashare ofconsumptionfortransactionpurposes.Aconstantshareoftheremainingsavingsis investedingovernmentbondsandtheresidualsavingsareheldassavingaccountdeposits indomesticcurrency.
Theforeignexchangemarketischaracterisedbyadisequilibriumbetweentheflowofforeign exchangedemandandsupply,asinCharpeetal.(2011).Therefore,thenominalexchange rate,measuredasdomesticcurrencyperunitofforeigncurrency,increases(decreases)with excessdemand(supply).Totaldemandforforeignexchangeisgivenbythesumofimports, theincomeaccount,i.e.theinterestpaymentsonforeignexchangedebtanddividendspaid totherestoftheworld,andtheflowdemandofthebankingsector,whichisdeterminedby the’no-FX-openposition’requirement.Totalforeignexchangesupplyisgivenbythesum ofexports,FDIflows,remittancesandothertransfersfromabroad,cross-bordercreditand foreignexchangedepositinflowstotheprivateandgovernmentsectorsand,dependingon thesimulatedscenario,concessionalloanstothegovernmentthatfinancepublicadaptation investment.
Thestock-flowconsistentstructureofthemodelisparticularlysuitableforstudyingexternal imbalances,thevulnerabilityofcountriestofinancialcrisesandthemacro-environmental channelsthatcanpropagatetheenvironmentaldamages,sincethemodeltracksnotonly theevolutionofcurrentaccountimbalancesandthefirst-roundnegativeeffectsofclimate damagesonthetradebalance,butalsothegrossexposuretoexternalfinancialrisks,which isusuallyneglectedwhenassessingexternalimbalances(BorioandDisyatat,2011,2015).The latterisexplicitlytrackedbytheendogenousinternationalinvestmentposition,aswellasby thedynamicsofavailableforeignexchangereserves.Furthermore,themultisectoralstructure allowsforadetailedexaminationofhowsuchfinancialrisksaredistributedwithinthecountry throughtheaccumulationofexternaldebtinthebalancesheetsofallinstitutionalsectors, andallowsfordetailedfeedbackeffectssuchaspriceeffects,throughtheevolutionofthe interestrates,andquantityeffects,suchasthequantityrationingintheforeignexchange market,theevolutionofdomesticnon-performingloansandtheoverallindebtednessofthe Tunisianeconomy.
Inordertocalibratetheparametersofourmodelweutilizeawidevarietyofeconomic data,listedinTable 4.TheCovarianceMatrixAdaptationEvolutionStrategy(CMA-ES) (HansenandAuger,2011)isusedtoempiricallyfitthemodeltoTunisianmacroeconomicand financialdataforvariablesforwhichwehaveasatisfactorilylargedataset.TheCMA-ESis
astochastic,evolutionaryoptimisationalgorithmthatisappropriateforthecalibrationof complex,nonlinearsystemsofdifferentialequationsasitallowsforanefficientexplorationof theparameterspace.Usingablockapproachandtakingintoaccounttheavailabledata,the calibrationoftheparameterswascarriedoutforfiveblocksrelatingtoproductionandpricing inprocessedfoodandnon-foodgoodsectors,consumption,imports,exports,andnonperformingloans.Theiterativeprocedurethatwasutilisedinthecalibrationprocessesisthe following.Anobjectivefunctionisdefined,whichmeasuresthedifferencebetweenthemodel’s predictionandactualdata.Then,theparameterspaceisdefinedthrougharangeofplausible parametervalues.Avectorofparametervaluesisrandomlyinitialisedandthesystemis simulatedthrougha4thorderRunge-Kuttamethod.Thecandidatesolutionsareevaluated andbasedontheirfit,themeanandcovariancematricesoftheparameterdistributionare updated.Then,anewparametervectorissampledfromtheupdateddistribution.Thelast twostepsareiterateduntilthealgorithmconvergestoasatisfactorysolution.Weprovidea completelistofparametersintheAppendix,withtheirvalues,definitionsandhowtheywere obtained.Forparametersforwhichanestimationwasnotpossibleduetothelackofalarge enoughsample,weusedthedataattheinitialpointofsimulationsforcalibrationtoensure thatthemodelreplicatestheeconomicdataaspreciselyaspossible.
SourceData-set
NationalInstituteofStatistics(INS)
CentralBankofTunisia
MinistryofAgriculture/NationalObservatoryofAgriculture
MinistryofFinances
UNCOMTRADE,WorldInternationalTradeSolution (WITS)
IntegratedEconomicAccounts(IEA),MacroeconomicAggregates,Supply-UseTable,FlowofFunds(FoF),Populationand LabourMarketStatistics
BalanceofPayments(BoP),InternationalInvestmentPosition (IIP),NetBankingProducts,ExchangeRates,ExternalDebt, Loansbysector,BondsandInterestRatesStatistics
DomesticproductionbycommodityinAgricultureSectorin quantity(Tonnes)andValue(TunisianDinar),Commodity prices
PublicDebt,Publicfinancialindicators,Taxesonprofitsand income
Imports/Exportscommodityinquantityandvalue(HS-6digits,Imports/ExportsCommoditypricesinDollar,Importsshare forconsumption,intermediateconsumptionandinvestment bysector(A,PFandF)
LaborproductivityinTunisiaandtheRestoftheWorld InternationalMonetary Fund FinancialSoundnessIndicators(FSI),IntegratedMonetary Statistics;BanksandCentralBank’sBalancesheet
PennWorldTable(PWT)
Table4:MaindatasetsusedtodeveloptheSFCempiricalmodel
InordertosimulatetheeffectsoflossesinagriculturaloutputontheTunisianeconomy,we makecertainassumptionsonthefutureevolutionoftheexogenousvariablesinthemodel. ThesevariablesandthedifferentscenariosontheirdynamicsarelistedinTable5below.
Forourinitialanalysis,weconstructthreedifferentscenarios:Thebusinessasusualscenario (BAU)definedabovewithnochangeincurrentmacroeconomicpolicies;anoptimistic scenarioinwhichwetakeintoaccountthelossesinagriculturalproductionundertheRCP 8.5projectionsbutassumethatfoodpricesriseinlinewithgeneralworldinflation(scenario RCPLI);andapessimisticscenarioinwhichweassumethatfoodpriceinflationexceeds
generalworldCPIinflationoverthenextthreedecades(scenarioRCPHI).11 Table5displays thesmoothedannualgrowthratesassociatedwithFigure4bofagriculturalproductionfor consumption(grypac),forintermediateconsumption(grypaic),forexports(grypaw)andgrowth rateofprocessedfoodexports(grPF X ).Forallscenarios,wesettheworldinflationrateof non-foodgoods(Inf NF,w)atthreepercent,whichistheaverageofthelasttwodecades. Throughoutthesimulations,weassumethatthetermsoftradeforallgoodsremainthesame, sothatinflationinimportsofnon-food(inf NF,w),processedfood((inf PF,w))andagricultural goodsforconsumption(Inf A,w C )andintermediateconsumption(Inf A,w IC )areequaltoinflation inthepricesofexportsofthesegoods(Inf NF X , Inf PF X and Inf A X respectively).Wecalibratethe labourproductivitygrowthfunction(seeAppendix,equations248-249)tosetitsvalue(gra) equaltoitsaveragevalueoverthelasttwodecadesinTunisiaat1.5%.Wealsoassumeno catching-uporlaggingintermsoflabourproductivitygrowthbetweenTunisiaandtherest oftheworldandthuswealsosetthegrowthrateoflabourproductivityintherestoftheworld ( graw)at1.5%.Thegrowthratefortheworldeconomy(grw)isfixedarounditsaveragevalue inthelasttwodecadesatthreepercentinallthescenarios.ForTunisia’spopulationgrowth rate(αpop),weuseUN’s’highvariant’scenarioprojectionswithanadditionalassumptionthat labourforceparticipationrateincreasesby4%overthenextthreedecadesandwesmooth thegrowthrateto0.7%peryear.
Thegraphsoffigure6showtheresultsofthesimulationsfortheBAUandthetwoRCP8.5 scenarios(RCPLIandRCPHI)describedabove.12 OurBAUscenariograduallystabilisesjust below13%unemploymentrateandgeneralinflationfallsbelow5%.Bothagriculturaland processed-foodinflationremainclosetothegeneralinflationrate.Similarly,economicgrowth isabove2%inthelongrun,inlinewithpopulationandgeneralproductivitygrowth.Inthe longrun,thepublicdeficitisaround5%ofGDPandthepublicdebtstabilisesat90%ofGDP. Startingfromover13%ofGDPinearly2018,thetradedeficitsettlesaround9%inthelong
11Thisisessentiallythedisturbingobservationofthelastdecade,asdocumentedbyBogmansetal.(2021).
12Wedonotbringtheeconomytoasteadystate,butsimulatethemodelstartingfromtheactualvaluesofthe Tunisianeconomyattheendof2017.Therefore,thedisequilibriumadjustmentprocessesleadtofluctuationsinthe modelbeforestabilising.Infact,withoutlaggingproductivitygrowthrelativetotherestoftheworldandduetothe largedepreciationofthenominalexchangeraterelativetodomesticinflation,therealexchangeratedepreciatesat thestartofallsimulations,leadingtoanexport-ledgrowthspurtthatstabilisesasthemacro-financialfeedback loopstakeeffect.
run,leadingtoacurrentaccountdeficitofroughly7%ofGDP.Astheexternaldeficitsettles downtoitslong-runvalue,thecountryslowlyaccumulatesforeignexchangereserves,which reachjustoverfourmonthsofimportsinthelongrun.Finally,foodimportsasashareofGDP stabilisecloseto4%ofGDPintheBAUscenarioandpercapitaincome,measuredin2017 Euros,risessteadilyto6000Euros.
Figure 5 summarisesthemainpropagationmechanismsfollowingacontinuousdecline inagriculturalproductionduetoclimatechange.Becauseweassumeaconstantrate ofproductivitygrowthintheagriculturalsector,inlinewiththerestoftheeconomy,falling agriculturalproductionleadstoandecreaseinemploymentintheagriculturalandprocessed foodsector,whichreduceshouseholdincome.Thisfallinhouseholdincomeleadstoafallin overallrealconsumption.However,thedynamicsofrealconsumptionoffood,processed foodandnon-foodgoodsisambiguousduetothelinearexpenditurespecificationofthe consumptionallocationdecision.Ontheonehand,lowerrealconsumptionlevelsunder RCP8.5leadtohighermarginalbudgetsharesoffoodandprocessedfoodandalower marginalshareofnon-foodgoodsinconsumption.Ontheotherhand,realconsumption offoodandprocessedfoodfallsbecausepriceinflationforthesegoodsishigherthanfor non-foodgoodsunderRCP8.5duetothehighcostofimportedfood.Asaresult,theoverall impactonrealconsumptionofnon-foodgoodsdependsonthemagnitudeoftheseeffects. Inoursimulations,thismechanismhasanoverallpositiveimpactontherealconsumption demandfornon-foodgoodsundertheRCPHIscenario(butnotRCPLI),mitigatingthenegative impactoflowerhouseholdincomes.However,withhigherfoodprices,theoverallshareof agro/processedfoodproductsinthehouseholdconsumptionbasketishigherunderboth RCPLIandRCPHIscenarios,despitelowerrealconsumptiondemandforthesegoods.In otherwords,householdsconsumelessfoodandspendahigherproportionoftheirtotal consumptionexpenditureduetoclimatechange.
Loweragriculturalproductionandthegrowingdemandforagriculturalandprocessedfood commoditiesalsopushagriculturalimportsaboveBAUlevels,whicharemuchhigherin
Figure5:TransmissionofLossofAgriculturalProduction
nominaltermsinRCPHIwithelevatedglobalfoodpriceinflation.Demandforforeignexchange isalsohigherwithahighertradedeficitdrivenbyfoodimports,andgivenourassumptionthat thegovernmentborrowsafixedproportionofthetradedeficitinforeignexchange,partofthis additionaldemandforforeignexchangeismetbypublicsectorforeignexchangeborrowing. However,thenominalexchangeratestilldepreciatesfasterthanintheBAU,pushingup inflation.
Risinginflationhasseveraleffectsontheeconomy.Ontheonehand,higherinflationpushes
uppolicyrates,pushinguprealdepositratesandlendingratesindomesticcurrency.While higherrealdepositratesreducethemarginalpropensitytoconsume,leadingtoafurther declineinconsumptiondemand,higherdebtfinancingcostsreducetherateofprofit,leading tolowerinvestment.Ontheotherhand,duetotheimperfectpass-throughofnominal exchangeratestodomesticinflation,therealexchangeratedepreciatesmorerelativeto BAU,reducingthepropensitytoimportnon-foodgoodsandtriggeringhigherexportdemand fornon-foodgoods.Theoverallimpactondemandfornon-foodgoodsisthusdetermined bythemagnitudeoftheseeffectsonconsumption,investmentandexports.Althoughinour simulationsthepositiveeffectofhigherexportdemandoutweighsthenegativeeffectson consumptionandinvestmentunderRCPLIandnon-foodproducersemployaslightlyhigher percentageofthelabourforcethanintheBAU,thisadditionalemploymentinthenon-food sectorisfarfromcompensatingforthedeclineinemploymentinagricultureandprocessed food,andtheoverallunemploymentraterisessignificantly 13 .
Whilerealdepreciation-inducedexportgrowthmitigateshigherunemploymentasmentioned above,rapidnominalexchangeratedepreciationhasevenmoreseriousconsequencesfor theexternalpositionandfiscalbalancesbothbypushingupthealreadyhighexternaldebt-toGDPratioandbyincreasingcountryriskandthustheassociatedfinancialacceleratoreffects. Highercountryriskraisesforeignexchangeborrowingratesforboththegovernmentand firms,whileatthesametimeleadingtogreaterrationingofNFCsbyinternationalmarketsand reducingthesupplyofforeignexchange.Theincomeaccountdeterioratesasaresult,putting furtherpressureonanacceleratingcurrentaccountdeficitanderodingforeignexchange reserves.14 Combinedwithhigheroverallunemployment,lowergrowth,lowertaxrevenues andhigherborrowingrates,thegovernment’soverallfinancingneedssoar,pushinguppublic debtfurther.
ThedynamicsoftheeconomyunderfallingagriculturaloutputareshowninFigure6,together withtheBAU,toillustratethemagnitudeoftheseeffects.Clearly,theeffectsoflossof agriculturaloutputareverysevereontheTunisianeconomy,whetherglobalfoodinflation remainslowornot.However,asexpected,theconsequencesaremuchdirerifglobalfood pricesincreaserapidlyinthenextthreedecades.UndertheRCPHIscenario,unemployment exceeds17%inthelongrun,withbothfoodandprocessedfoodimportsmovingtowards two-digitlevelsinthelong-run.Tradedeficitexplodesabove13%,drivenbyhighlevelof foodimports.Similarly,currentaccountdeficitsetsonanunsustainablepath,asthecountry runstheriskofaloomingcurrencycrisiswithadepletionofFXreserves.Publicdeficitand publicdebtlevelsindicaterisingpossibilityofadefaultonpublicdebt,asdebttoGDPratio exceeds140%inthelong-run,withnosignofstabilizing 15.Percapitaincome,measuredin 2017Euros,barelygrowsuntil2050.Inshort,allelseequal,no-actionagainstclimatechange pavesthewayforanalmostcertaineconomiccrisisforTunisiaunderrapidlyrisingglobal foodprices.
Next,wesimulatetwodifferentadaptationpolicyscenariosenvisagedbytheTunisian governmentandoutlinedinthe’Water2050Plan’(Jeffetal.,2020).Whilethisplanincludes severaldifferentadaptationscenarios,wechosetosimulatetwoofthem,namelythe ReinforcedTendencyScenario(RTS)andtheWaterandDevelopmentScenarios(WDS). Table6summarisesthemainassumptionsbehindthesescenarios.IntheRTS,economic growthremainsaroundits2018valueat2.5%.Similarly,thewaterelasticitiesofproductionin
13UndertheRCPHIScenario,employmentinthenon-foodsectoralsofallsbelowtheBAUlevels.
14NotethatwehavenotimposedanyrationingofgovernmentFXborrowing,andthehigherFXdemandcausedby highertradedeficitsispartlymetbygovernmentFXborrowing,asthegovernmentborrowsafixedproportionofthe tradedeficitinFX.
15NotethatwehavenotassumedanyrationingonpublicFXborrowingtoshowtheimplicationsofclimatechange onpublicfinancesclearly.Withsuchelevateddebtlevels,thepublicsectormayfacehighrationinginFX-borrowing, causingacurrencycrash
manufacturingandservicesremainattheirobservedvaluesin2020,whilewaterelasticity ofagriculturalproductionisassumedtofallto0.2.Insuchacase,agriculturalproduction canonlygrowby1%peryear,despiteastrongadaptationinvestmentplantoincreasewater resources,astheavailablewatersupplyismainlyconsumedbytheindustrialandservice sectorsandthuscannotsupportahigheragriculturalgrowthrate.IntheWDSscenario,onthe otherhand,amuchmoreefficientwaterusestrategyinthesesectorssignificantlyreduces thewaterelasticitiesofproductioninallsectors,allowingagriculturalproductiontogrowby 3.5%peryear,alongsideanoveralleconomicgrowthrateof4.3%peryear 16 .
InlinewiththeWater2050plan,weassumethatpublicandprivateadaptationinvestments areboth1.1%ofGDP,andthatpublicinvestmenthasaveryhighimportpropensityof60%,as itinvolvestheconstructionofdesalinationandwastewatermanagementplants,someof whichwillbesolar-powered.Itisalsoassumedthatthepublicadaptationinvestmentwillbe financedbyforeignexchangeloansatafixedrateof1.7%,whichistheinterestrateontheloan fortheSfaxdesalinationplantcurrentlyunderconstruction(JapanInternationalCooperation Agency,2017).Inourmodel,themedium-andlong-termgrowthrateoftheeconomydepends strictlyonthegrowthrateoflabourproductivity.Thus,toachievethehighgrowthrate envisagedintheWDS,weassumethatpublicinvestmentgrowsatamuchhigherratethan inpreviousscenarios,at4.5%,andthatefficientinvestmentinareassuchasinfrastructure, health,R&Dandeducationgraduallyraisesthegrowthrateoflabourproductivitytoover threepercentperyearby2050.Thisisinlinewiththeendogenousgrowthliterature,as detailedinAgenorandYilmaz(2012,2016),andobservedbytheIMF(XiaoandLe,2019).
Figure7showstheresultsofthesimulationsforBAU,RCPHI,RTSandWDS.17 Thegradualincreaseinlabourproductivity,drivenbypublicinvestment,andtherapidgrowthinagricultural productionhavesignificantpositiveeffectsonmacroeconomicdynamics,despitethehigh levelofadaptationinvestmentandthehighimportpropensityundertheWDS.Unemployment
16Theadaptationplandoesnotspecifythegrowthofagriculturalgoodsforconsumption,intermediateconsumption orexports.Thus,inoursimulations,wesetthegrowthrateoftheseequaltothegeneralgrowthrateofagricultural productionundereachadaptationscenario.
17InordertoensurethattheshareofagriculturalemploymentremainswithinreasonablelimitsundertheWDS scenario,weassumethatlabourproductivitygrowthintheagriculturalsectorisequaltothegrowthrateofagricultural outputat3.5%.
fallssteadilyto6%by2050andgeneralconsumerpriceinflationisbroughtdowntobelow theBAUlevels,around4%18.Similarly,processedfoodpriceinflationremainsjustbelowto BAUscenario,slightlyabovegeneralinflationwhileagriculturalgoodsinflationislowertha baselinethroughoutthesimulationperiod.Economicgrowthinitiallyfluctuates(drivenby 18Borio(2014)proposesadistinctionbetweennon-inflationary(potential)outputandsustainableoutput,thelatter dependingonsystemicmacro-financialdevelopmentsandexternalimbalances.Ourmodelsimulationssupport thismodellingfeature.
theexport-ledgrowth,asdiscussedabove)tosettleat4.2%,inlinewiththeWDSprojections. Exportsgrowstronglyduetohighproductivitygrowth,andimportsofintermediateandcapital goodsfallsteadily,improvingthetradebalancetoaround7%ofGDP.Theincomeaccount alsoimprovesslightly,leadingtoacurrentaccountdeficitjustbelow7%inthelongterm.19 Afteraslightdeclineinthefirstdecade,foreignexchangereservesasashareofimportsare setonanincreasingpathtowardssustainablelevelsinthelongterm.20 Despitetheincrease inforeigncurrencyloanstofinanceadaptationinvestment,thetotalforeigncurrencydebtto-GDPratioissetonadecliningpathafterinitiallyrising,fallingbelowBAUlevelstojust under60%inthelongrun,therebyreducingcountryriskandinterestratesonpublicforeign currencyborrowingandeliminatingtheunsustainableaccumulationofforeigndebtinRCPHI. Hightaxrevenuesandlowunemploymentleadtoasustaineddeclineinthepublicsector deficitto3.5%andinthepublicdebt/GDPratioto70%inthelongrun.Percapitaincome, measuredin2017Euros,risesrapidlyto9000Eurosby2050asfoodimportsfallbelowtwoper centofGDP,movingTunisiamuchclosertonear-totalfoodsecurity.
TheRTS,ontheotherhand,paintsaverydifferentpicture.Whilethepositivemultipliereffects ofpublicandprivateadaptationpoliciesreduceunemploymentbelowtheBAUlevel,the currencydepreciatessharplycomparedtoallotherscenarios,keepinggeneral,foodand processedfoodinflationclosetothehighinflationscenario.Despitethepositiveimpactof therealdepreciationonnon-foodtrade,lowoverallproductivitygrowth,highimportcostsof adaptationpoliciesandincreasedfoodimportcostsduetoadepreciatedcurrencyleadtoa tradedeficitoftwelvepercent.Coupledwithanexplodingincomeaccountdeficit,thecurrent accountdeficitreacheselevenpercentofGDPandforeignexchangereservesasashareof importsfallbelowtheRCPHIlevelsinthelongrun.Countryriskalsoexplodestolevelsabove RCPHI,bringingforthamuchhigherprobablityofrationingonpublicFXborrowing.Duetothe sluggishgrowthrateoftheeconomy,publicadaptationinvestmentputsstrongpressureon thebudgetdeficitandpublicdebt,astotaldebtfirstexceedsthehighinflationscenariolevel andstabilizesinthelongrunataroundthesamelevel,withexcessiveexternaldebtdriving theincrease.PercapitaincomegrowthalsoslowsdowntoRCPHIlevels,aggravatedbythe rapiddepreciationofthenominalexchangerate.
ClimatechangewillputsignificantpressureonagriculturalproductionlevelsinTunisia, reducingbothproductionfordomesticconsumptionandthetwomainexportcommodities, olivesanddates.Thecostsofnoactionaresevereinmacroeconomicterms,andtheNFC sectorcannotcompensateforthelossesinruralemploymentandproductionifproductivity growthremainssluggishrelativetotherestoftheworld.Theresultisexcessivefiscaland currentaccountdeficits,leadingtounsustainablepublic/externalbalancesandalooming currencycrisis,especiallyifpublicfinancingofexternaldeficitsthroughFXborrowingdriesup inthefaceofelevatedcountryrisk.Theaccumulationofsuchmacroeconomicimbalances
19WehaveassumedthatFDIremainsafixedpercentageofNFCsectorproductionthroughoutthesimulations. Wepartlyunderestimatetheseinflows,asthefavourableeconomicconditionsunderthishigh-growthregimemay triggeranincreaseinFDIinthemediumandlongterm,leadingtoafurtherimprovementinthecurrentaccount.
20Throughthesesimulations,wekepttheratioofpublicFXborrowingtotradedeficitconstant,despiteafalling tradedeficit/GDPratio.Inessence,thereisaconstantneedforcoordinatedmonetaryandfiscalpoliciestoprevent currencyappreciationandensureFXreserveaccumulationandpublicsolvency.Asisthecaseforalldeveloping economies,realcurrencydepreciationinducedbycentralbankinterventioninforeignexchangemarketsmayreduce tradedeficitsatthecostofreducingpercapitaincomeinFX.However,thepositivetradeeffectsofrealdepreciation arelimited,taketimetomaterialiseandareconstrainedbyproductivitygrowthdifferentials,thecomplexityof exportsandthesizeofthetradablesector.Ontheotherhand,depreciationimmediatelyincreasesthedomestic currencyvalueofpublicandprivateFXdebt,increasingcountryriskandthelikelihoodofpublic/privatesector insolvency.WhilepublicFXborrowingmayprovidetheeconomywithmuch-neededFXreserves,increasesinpublic debthaveadestabilisingfinancialacceleratoreffectthroughdomesticandFXbondinterestrates,subsequently worseningtheincomeaccountandleadingtogreaterrationingofcross-borderborrowingbyfirmsorthegovernment. Theseconsiderationscallformuchmoresophisticatedcoordinationbetweenmonetaryandfiscalpolicytoensure sustainabledevelopmentthanthesimpleborrowingrulesweusedinourmodel.
willbeexacerbatedifglobalfoodinflationishigherthangeneralglobalinflationorifTunisia’s exportpartnersgrowslowlyinthecomingdecades.
Whilepolicymakershaverecognisedtheseverityoftheproblemandhaveformulatedlongtermadaptationstrategiesthatincludeinvestmentsinwatersupply,reducinglossesin thedistributionprocessandrehabilitatingexistingreservoirs,thesestrategiesarecostly andrequiretheparticipationoftheprivatesectorintheprocessalongsidethepublic sector.Inaddition,increasingwatersupplyrequirestheconstructionofdesalinationand wastewatertreatmentplants,aswellasenergyresourcestopowertheseunits,whichin thecountry’scurrenteconomicstructurerequireimport-intensiveinvestments.Thus,the financingstructureandcostsofadaptationpoliciesplayacentralroleindeterminingtheir overalleconomicimpactandeffectivenessinstabilisingtheeconomyinthelongrun.
Evenwiththeplannedincreasesinwatersupply,thesimultaneousachievementofwater securityandeconomicdevelopmentwillrequiresignificantreductionsinthewaterelasticity ofproductioninagriculture,industryandservicesthroughtheadoptionofwater-efficient productiontechniques.Theseimprovementsshouldalsobeaccompaniedbyrapidgrowth ineconomy-wideproductivitylevels.Efficientpublicinvestmentinalargepusheffortto stimulatethisproductivitygrowthisthereforecrucial.Ourresultsshowthateconomic developmentandwatersecurityarenotorthogonalifsuchproductivity-enhancingpublic policiesareimplementedtogetherwithwater-efficientproductionmethodsandadaptation measures.
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Realdomesticagriculturalproduction (Y P,A , 1) issplitinthreecomponents:realagricultural productionfordomestichouseholdconsumption (Y P,A C ),forintermediateinputconsumption byothersectors (Y P,A IC ),andforexports (Y P,A W ).Allthreecomponentsofagriculturalproduction aredeterminedbyclimaticconditionsaswementionedaboveandarethereforeexogenous tothemodel.21
Asexplainedinthemaintext,weuseAdapt’ActionandFAOmodelsinordertoprojectthe productionlevelsofthesegoodsinoursimulationperiod.Wethensmooththeproduction pathsandcalculateconstantgrowthratesforeachcategoryofagriculturalproduction:
Aggregaterealdomesticdemandforagriculturalgoods (Y D,A , 5) iscomposedofreal consumptiondemand (Y D,A C , 6) fromhouseholds (CA) andrealintermediateconsumption demand (Y D,A IC , 7) fromprocessedfood (ICA PF ),NFCsectors (ICA NF ),theagriculturalsector (ICA A ) andthegovernmentsector (ICA G ).Weassumethatthedemandforexportsalways matchessupplyandthusrealexportsofagriculturalgoods (X A , 8) aregivenbytheexogenous supply (Y P,A W )
Inordertoproduce,theagriculturesectorusesintermediateinputsfromitsownproduction (ICA A ) ,fromprocessedfoodsector(ICPF A ) andfromothernon-foodsector (ICNF A ).The demandforthesegoodsinrealtermsaregivenbyfixedinput-outputcoefficients αA A,αPF A and αNF A .
Inwhatfollows,theproducersectorisdenotedwithasuperscriptandthedemandingsectorwithasubscript.
Giventheconsumptiondemandbyhouseholdsandintermediateconsumptiondemand fromallsectors,theexcessdemandinagriculturesectorismetbyimportsfromtherestof theworld.Thus,importsofagriculturalconsumption (IM A C ) andintermediateconsumption (IM A IC ) aregivenby:
Theremainingnon-financialsectorsaredividedintotwosectors;aprocessedfoodindustry, denotedas PF ,andasectorthatproducesallprivatenon-foodgoodsandnon-financial servicesintheeconomy,denotedas NF .Processedfoodissoldtohouseholdsforconsumption (CPF ),exportedtotherestoftheworld (X PF ) anddemandedasintermediate consumptionbytheagricultural (ICPF A ),processedfood,(ICPF PF ),non-food(ICPF NF )andthe governmentsectors(ICPF G ).Similarly,thehomogeneousgoodproducedbythenon-food secrtorisdemandedforconsumptionbyhouseholds (CNF ),andintermediateconsumption byallsectorsincludingbanks (IC
).Wefurtherassumethatthis isthecapitalgoodoftheeconomy,purchasedforinvestmentbythenon-financialsector itself(processedfoodandnon-foodNFCsector, I NF F ),households(I NF H )andthegovernment (I NF G ),andexportedtotherestoftheworld(X NF ).Thustherealaggregatedemand(net ofimports)fortheoutputoftheprocessedfood(Y D,PF ,15)andtheNFCgood(Y D,NF ,16}) sectorsaregivenby:
,
), j ∈ (PF,NF ) denotetheimportsharesofelementsofaggregate demand,tobedefinedbelowand ICPF and ICNF arerespectivelythetotalintermediate consumptiondemandfortheprocessedfoodandnon-foodsectorgoods,and I NF ( 17) isthetotalcapitalinvestmentintheeconomygivenbythesumofsectoralinvestments ofagriculture(I NF A ),processedfoodandnon-foodNFCs(I NF F ),government(I NF G ),and households(I
H )
.
Asintheagriculturalsector,processedfoodandnon-foodsectorsuseintermediateinputs fromagriculture,processedfoodandnon-foodsectors.Intermediateconsumptiondemand functionsaregivenbythetechnicalcoefficientsandthelevelofproductionofthesesectors (Y P,PF and Y P,NF ).
Forthegovernment,realintermediateconsumptiondemandforfoodandprocessedfood dependsonpublicemployment(N G),whereasintermediateconsumptionofnon-foodsector goodsdependsonpubliccapîtalstock(KG):
Thus,totalintermediateconsumptiondemandforprocessedfoodandnon-foodsectorgoods are:
Thegoodsmarketsarecharacterizedbydisequilibriasuchthataggregatedemandlessof imports(Y D,PF or Y D,NF )isnotnecessarilyequaltototalproduction(Y P,PF , Y P,NF ).Firms formadaptiveexpectationsonrealexpecteddemandforprocessedfood(Y e,PF ,25)andthe NFCgood(Y e,NF ,26):
where αpop isthepopulationgrowthrate,
isthegrowthrateofcapitalstockinthe totalNFCsector,and βPF y and βNF y aretheadjustmentspeedsofexpectationstoexcess demand,specifictoeachmarket.Thus,thetrendrateofgrowthintheprocessedfood
sectorfollowspopulationgrowthrateandthatofthenon-foodNFCsectorfollowscapital accumulation.
Bothprocessedfoodandnon-foodmarketsareindisequilibriumsuchthatproduction(Y P,i) doesnotnecessarilyequaldemand(Y D,i).Themarketdisequilibriumateachpointintimeis clearedbyinventory(dis)accumulationinbothmarkets(V i,27).
Theproductivesectornotonlyproducestomeetexpecteddemand,butalsotoensurethatit hasthedesiredlevelofinventoriesdefinedin(28).Thisproductionforinventoryreplacement isgivenbyanadjustmentequationtothedifferencebetweenthedesiredandtheactual inventorylevelforeachmarket(I i V ,29):
Y P,i , 30)ineachsectoristhenequaltothesumofexpectedreal demandandproductionfordesiredinventoryreplacement.
Employmentinthenonfood(N NF , 31)andprocessedfood(N PF ,32)sectorsaredetermined viaaLeontieffproductionfunction,withsectorallabourproductivitylevelsgivenby aPF and aNF respectively.
Realimportsofprocessedfood(IM PF ,33)andthenon-foodgood(IM NF ,34)dependon thedifferenttime-varyingimportpropensities(σi M,j ,i ∈{PF,NF },j ∈{C,IC,I })outofreal levelsofconsumption,intermediateconsumptionandinvestment.Inaccordancewiththe data,weassumethattheprocessedfoodisnotusedforinvestmentandthusnotimported forthispurpose.
Thecorrespondingnominalimportsofprocessedfood(IM PF N ,35)andtheNFCgood(IM
, 36)aredefinedas:
where pPF,w and pNF,w aretheworldimportpricesofprocessedfoodandnon-foodgood respectivelyand eN isthenominalexchangerate.Thepropensitiestoimportmovetowardsthe targetimportpropensities(σi,Tar M,j ,37),whicharenegativefunctionsofsector-specificrelative prices,importtaxes (τ i M,j ) andtheelasticityofsubstitutionbetweenimportedanddomestic goods( j 1,i).Aswellasrelativeprices,thetargetpropensitiesalsodependonrelativelabour productivityofTunisia (takenastheproductivityinthenon-foodsector, aNF ) withrespectto itstradepartners(aW ),whichcapturesnon-pricedeterminantsoftradecompetitiveness. Thespedofadjustmenttothetargetpropensitiesisgivenby βi M,j in(38)23 .
Processedfoodexports(X PF )dependontheabilityoftheagriculturalsectortoprovidethe necessaryintermediateconsumptionandthereforegrowatanexogenousrategivenby theclimateandadaptationscenarios(39).Exportsofthenon-foodgood(X NF ,40)onthe otherhandaredeterminedbytheexogenousworldGDP(GDP W )andatimevaryingexport propensity(σNF X ),whichdependsonrelativepricesandrelativelabourproductivityasabove: Aswithimportshares,theexportpropensityadjuststoitstargetvalueslowly,witharelaxation speedof 1/βNF X
Thereareseventeendifferentpricesforgoods,theseareeitherdenominatedindomesticor foreigncurrency:
• Producerprice(pi P )foreachproductindomesticcurrency, i ∈{A,PF,NF }
• Consumerpriceforeachproduct(pi C )indomesticcurrency, i ∈{A,PF,NF }
• Intermediateconsumptionpriceforeachproduct(pi IC )indomesticcurrency, i ∈ {A,PF,NF }.
23Aswementionedabove,processedfoodgoodsarenotusedforinvestmentandthus σPF,Tar M,I =0 and σPF M,I =0 Wethusexcludethisvariablefromourlistofvariablesandoursimulations.
• Capitalgoodpricefornon-foodsector(pNF K )indomesticcurrency.
• Importpriceforprocessedfoodandnon-foodsectorgoods(pi,w)inforeigncurrency, i ∈{PF,NF }
• Importpriceforconsumptionandintermediateconsumptiongoodsofagriculturesector (pA,w i ), i ∈{C,IC}
• Exportpriceforeachproduct(pi X )inforeigncurrency, i ∈{A,PF,NF }.
Weassumethatthetwointernationalpricesforimportsandexportsforeachtypeofproduct followexogenouslevelofinflation.Aswementionedabove,foragriculturalgoods,we distinguishbetweeninternationalpricesofconsumptiongoods(pA,w C )andintermediate consumptiongoods(pA,w C ),whileweassumethatthereisasinglepriceinflationconsumption andintermediateconsumptionofprocessedfoodandnon-foodgoods24 .
Forallproductivesectors,producerssetamark-uponhistoricalunitcoststodeterminea targetproducerprice.Pricesaresticky,andactualproducerpriceslowlymovestowards thetargetproducerprice.Consumer,intermediateandcapitalgoodpricesaredetermined asaweightedaverageofdomesticproducerandimportprices,takingintoaccountall appropriatetaxesandsubsidies.
Unitcostsfortheagriculturalsector(UCA , 46)dependontotalwages(where wA isthewage rateinagriculturesectorand N A istheemployment)andemployer’ssocialcontributions (ESCA , 69),intermediateconsumptioncostsmeasuredatintermediateconsumption pricesforagricultural(pA IC ),processedfood(pPF IC )andnon-foodgoods(pNF IC )andtaxes onproduction(T A pr),dividedbytotalagriculturalproduction.
Agriculturalhistoricalunitcosts(HUCA)followactualunitcosts:
)
Thetargetagriculturalproducerprice(pA,Tar, P , 48)isaconstantmark-up(µA)overhistorical unitcosts.
Thedeterminationofdomesticprocessedfoodpricesissimilartoagriculturalproducts.The unitcostsinthesectorare:
Historicalunitcosts(HUC
)followactualunitcosts:
Thetargetprocessedfoodproducerprice(
)over historicalunitcosts.
Intheprocessedfoodsector,mark-upoverhistoricalunitcosts(µPF , 55)changesover timetoreflectdemandpressures.AsinYilmazandGodin(2020),wemeasurethisdemand pressureasthedeviationofactualinventoriesfromtheirdesiredlevel:
Consumerpricesfornon-foodgoodsisacombinationofdomesticproductionandimport priceswithtaxesandsubsidies:
where τ NF VA isthevalue-addedtax, subrNF isthesubsidyrate, otaxNF istherateonothertaxes, τ NF M istheimporttaxrate.Transportationandcommercemarginsdonotaffectdomestic pricesinthissectorasthesectorbothpaysandreceivesthesecosts.
Thenon-foodsector’sgoodisalsousedforcapitalaccumulation.Thepriceofcapitalgoods (pNF K , 66)isgivenby:
Agriculturalsectoremployslabourforce(N A , 68)attheongoingwage(wA),payingatotal wagebill WBA (67).Employmentdependsontotalrealagriculturalproductionandlabour productivity(aA)inthesectorthroughaLeontieffproductionfunction(68).
, 69)isafixedfractionofthewagebill.
, 70),whichweassumetobeaconstantshare ofproduction.
Thesectoralsopaystaxesonproduction(
where eN denotesthenominalexchangerate.
Themixedincomeoftheagriculturalsector(MI A , 71)isgivenbythevalueofproduction fordomesticmarketsatproducerpricesandexportslessofwagebill,employer’ssocial contributionsandtaxesonproduction:
paymentsonitsdomesticcurrencyloansandoninsurance(Ins
paidtothefinancialsector.Thus,itsnetincome(
actualcapitalstock
Afixedfractionofthecostsofinvestmentisfinancedbyretainedearnings(RE
, 76)from thenetincomein(72).Therestisborrowedfromthebankingsectorindomesticcurrency loans(LA D).Weassumethatthereisnorationingonagriculturalloandemand.
A.1.3.2.
Inordertodeterminethefinancingneedofnon-financialcorporations,wecombinethe balancesheetsofprocessedfoodandnon-foodsectors.Theconsolidatedgrossoperating surplusforprocessedfoodandnon-foodenterprises(GOSF T ,79)isgivenbythedifference betweensalesincomeandtotalcosts.Salesincomeiscomposedofsalesofprocessedfood andthenon-foodgoodforfinalconsumptionandintermediateconsumption,salesoftheNFC
goodasthecapitalgoodforinvestment,exportsofthetwosectors,marginsandsubsidies. Weuseconsumerpricestocalculatesalesrevenuesandsubtractimporttaxes(TIM ),valueaddedtaxes(VAT ),andothertaxes(Otaxes),Costsincludewagecostscalculatedassectoral wagelevel(wi )timesemployment(N i),employer’ssocialcontributions(ESCi)andtaxes onproduction(T i pr)for i ∈{PF,NF }.
Apartof
Grosssectoralprofits(GF F ,82)isthedifferencebetweentotalincome,whichincludes GOSF andinterestreceivedondomesticdepositssaved(i
DepF,sav
),andtotalpayments,which includesinterestpaidondomestic(
),insurance(InsF ), commissions(ComF )andtransfers(Transf
)paidtothegovernment:
Asintheagriculturalsector,theinterestpaidtothebankingsectortakesintoaccountthe non-performingloansrateforNFCs(βF npl).Thenetprofitsofthesector(F F )afterpayingtaxes onprofits
Targetcapitalinvestment(I Tar F,D , 84)fordomesticNFCsdependspositivelyonthereturnon capital rF netofproducerpriceinflation(pNF P /pNF P )inthenon-foodsectorandrealprivate sectorinvestmentinadaptation(IF,irrig , 85):
Nominalvalueofprivatesectoradaptationinvestmentissettoapercentageof nominalGDPasintheadaptationplansofTunisia.Thus, IF,irrig becomes:
Thisisbecausewetreatourhouseholdsaspurehouseholdsandhenceuseonlyhousing investment,whichwewilldefinebelow,tobedecidedbyhouseholdsinthemodel.Weadd therestofthehouseholdinvestmentintheSNAdatatotheNFCsector.Thismeansthat theinvestmentbyproducer-householdsisalsotreatedasbeingcarriedoutbytheNFCs sotheappropriateprofitratemusttakeintoaccounttheafter-taxgrossoperatingsurplus distributedtohouseholds.
Partoffirms’after-taxprofits(F
, 82)arekeptasdomesticcurrencydeposits(Dep
D )for liquidity&workingcapitalneeds.This,weassumeisafractionofthewagebillandemployees socialcontributionspaidbythesector.
Similarly,firmskeepacertainamountofprecautionarydepositsinFX(DepF FX )inthedomestic bankingsector,whichdependsonthetotalstockoftheirFXloans(LF FX ).
FN F , 97)netofcurrentaccountdepositsindomesticcurrencyandFXisthen givenby:
dividendstohouseholds(Div
H , 102),government(
, 104).
Theremainingfundsareretainedtofinanceinvestment.Thus,thefinancingneedofthe NFCsector(TFN F , 105).canbefoundasthetotalcostofdomesticinvestmentminusthese retainedearnings:
oftheirtotalfinancingneedsviaborrowingin foreigncurrency(LF,des FX , 106)fromdomesticbankswhich,aswewilldiscussindetailbelow,act
asanintermediarybetweenfirmsandtherestoftheworldandlendfirmsthecross-border fundstheyborrowfromabroad.
FXborrowingfromabroadbybanksisrationedattheendogenousrate ratFX , tobedefined below.TheactualshareofFXfinancingforfirms(β
F , 107)isthen
, 108)isgivenby:
109).
Followingtheliteratureonnon-performingloansrate,citedinthemaintext,thetargetgeneral non-performingloansrate(βF,Tar npl , 110)intheeconomydependsongrossbankprofits(GF B )to bankequity(OF B )ratio,inflation(inf H ),realgrowthratedefinedasthegrowthrateofnominal GDP(D[NomGDP,t]/NomGDP )lessofinflationandtheunemploymentrate(unemp):
Theactualnon-performingloansrateintheNFCsector(βF npl)movestowardsthistargetwith atimelagof
25:
Thebankingsectorsetsthedepositratesforfirmsandhouseholds,lendingratesindomestic currencyandFX,aswellascomissionratesonfinancialtransactions.
Thetargetdepositrate(iDep,Tar D , 112)onfirm’ssavingaccountsissetasamarkdown (depmarkdown, 113)fromthepolicyrate(ip).AsinYilmazandGodin(2020),weassumethatthe valueofthemarkdowndependsontheratiooftotaldomesticcurrencyassetsofthebanking sectortofinancingfromthecentralbankasadvances(Ad).Asbanksfinancethemselves fromviathecentralbank,theyreducethespreadbetweenthepolicyrateandthedeposit ratefallsinordertoattractdeposits.
Inthesimulations,weputalowerboundtothenon-performingloansrateat2%toavoidnegativevalues.
Theactualeffectivedepositrate(iDep D )movesslowlytowardsthistargetvalue.
Inlinewiththedata,weassumethatfirmsofferaslighlyhigherdepositratetohouseholds (iDep,H D ),measuredbytheterm(hhdp).
Inordertodeterminethelendingrates,thebankschargeapremium(prem2, 120) overtheir averagefundingcosts(AFC, 118)
Theaveragefundingcostsarecalculatedastheweightedaveragecostofdepositfinancing andcentralbankfinancing.
where DepH,sav D isthesavingaccountsofhouseholds, DepF,sav D isthesavinaccountsofNFCs, andthetotaldomesticcurrencydepositsinthebankingsector(DepD)isthesumoftotal household(DepH D ),firm(DepF D)andtherestoftheworld(DepW D )depositstobedefined below.
Thepremiumondomesticcurrencyloansdependsontheinterestpaymentstogross operatingsurplusratio:
Theaverageinterestratemovesslowlytotheinstantenousinterestratewithaspeedof
idL, whichreflectsthematurityofdomesticloans.
Asindeposits,theinterestrateonhouseholdloansishigherthantheinterestrateonNFC loans,measuredby hhlp.
Asdiscussedabove,weassumethatborrowinginforeigncurrencybydomesticfirmstakes placeviathedomesticbankingsector.Therefore,domesticbanksactasanintermediary betweenthesedomesticfirmsandforeignfunds,chargingtheNFCsaninstantenousFX lendingrateof iL,Tar FX (123)andearningapositivespreadoverthecross-borderbankborrowing rate(iB FX )duringtheprocess.Thisspreadisamultiple(ρ4)ofthedomesticcurrencylending premium.
TheeffectiveinterestrateonFXloans(i
)alsomovesslowlytowardstheinstantenousrate duetomaturitystructure.
Thebankingsectorusescross-borderborrowinginordertolendinFXtotheNFCs.Therate atwhichbanksacquireFXfundsfromabroadisdeterminedbyapremium(prem1)overthe risk-freeglobalrate(iW FX ).
Thepremiumoncross-borderlendingrate(prem1,126)dependsonthecountryrisk(rsk, 127) non-linearly,whilecountryriskismeasuredasfinancialinternationalinvestmentposition (FIP, 128),givenbytheratioofcountry’sFXdebttonominalGDP(NomGDP ).
Aswellasitseffectonthepricingofcross-borderlendingviathepremiums,thecountryrisk alsohasaquantityeffectontheamountofFXborrowingbybanks.Moreprecisely,ahigher countryriskleadstoahigherrationing(ratFX )ofFXloandemandbythebankingsector.We assumetherationingfunctionhasasigmoidshape,withlowerandupperboundsgivenby LBrat and UBrat, withaninflectionpointat MPrat
Thebankingsectorprovidesinsuranceservicestoagriculture(InsA , 130),NFCs(InsF ,131)and households(InsH , 132)ontheircapitalstock,chargingaconstantpremiumrate.
Similarly,agriculturesector,NFCsandhouseholdspaycomissions(Com)tothebankingsector ontheirliabilities.Forsimplicity,weassumethevalueofthesecomissionsarefixedratiosof domesticcurrencyloanstothesesectors.
Thus,thegrossprofitsofthebankingsector(GF B ,141)isgivenbythesumofitsrevenues andexpenses,takingintoaccountthenon-performingloansbyfirms,agriculturesectorand households.
Thesectorpaystaxesonprofitsattherate
.Netbankingprofits(F B , 142)arethendefined as:
BanksaresubjecttoaBasel-typecapitaladequacyratiowhichdeterminesthetargetown fundsofthesector(OF B,Tar , 143).Thistargetisdefinedasapercentageoftherisk-weighted assets.
Weassumethatinordertostrengthenthecapitalpositionofthebankingsector,thecapital adequacyratio(of, 144)smoothlyrisesovertimefromitsinitialvalueattheinitialtimeof simulations(t0
Inordertoderivethefinancingneedsofthebankingsector,westartwiththeassetand liabilitydynamics.Firstweassumethatthesectorbuys(BG B , 151)allthedomesticcurrency governmentbondsnotpurchasedbyhouseholds(B
) orthecentralbank(BG CB ).
borrowingfromthecentralbankintheformofadvances(
AstrictnoopenpositionappliesintheFXsideofthebankingsector’sbalancesheetsuch thatFXassetsofthebankingsectorisgreaterorequaltoitsFX-denominatedliabilities.Sothe reauiredno-open-positionchangeinbankFXreserves(
, 157)is
Governmentpaysemployer’ssocialcontributions(ESCG , 163)forpublicworkersandalso receivesit.Thevalueperpublicemployeeisafixedfractionofpublicwages(wG):.Similarly, employers’socialcontributionsperemployeeintheprocessedfoodandnon-foodsectors arefixedfractionsofrespectivewagesinthesesectors:
Thus,thetotalemployer’ssocialcontributionsreceivedbythegovernment(ESC, 164)is:
Aswellasthesocialcontributionspaidbyemployers,labourersalsopaysocialcontributions (WSC)outoftheirgrossnominalwages,receivedbythegovernment:
Thegovernmentleviesvalue-addedtaxonconsumptiongoods(VAT ) fromeachsector, determinedbysectoralrates τ
Thegovernmentsubsidizesagriculturalsectorattherate subra andtheprocessedfood/nonfoodsectorsat subrPF and subrNF respectively.Totalsubsidies(sub) aregivenbythesumof allsubsidies.
Thegovernmentspendsonsocialsecurityandwelfare(GE, 186),whichdependsonthe numberofunemployedpeopleandtheaveragewagerateinthenon-financialsector.
Italsodistributesothertransferstohouseholds(Transf G H , 187):
Publicinvestmenthastwocomponents:Investmentinadaptation(IG,irrig )andinvestment incapital(IG,cap).InlinewiththeWater2050plan,citedinthemaintext,wesetthepublic investmentinadaptationaconstantfractionofnominalGDP.Aswithprivateinvestmentin capital,publicadaptationinvestmentmovesslowlytoitstargetvalue.
G isthedepreciationrateofpubliccapital. Inordertofinanceitsdeficit,thegovernmentborrowsindomesticcurrencybonds(BG) and inFXfrominternationalmarkets(LG FX ).Weassumethatpublicadaptationinvestmentis financedbyFXloansfrommultilateralorganizations(LG,Adap FX , 193)and/ordevelopmentbanks atthepreferentialinterestrate i
TheinterestrateonFXborowingbythepublicsector(iL,G FX , 197)isapremiumovertherisk-free worldrate(iW FX ).Asinthebankingsector,thepremiumdependsonthecountryrisk:
Thus,thetotalspendingofthegovernment(GT , 198)ateachpointintimecanbefoundas thesumofpublicwagesandemployer’ssocialcontributions,intermediateconsumptionof thegovernment,interestpaymentsonpublicdebtandtransferstohouseholds:
Thegovernmentalsokeepsacertainamountofdomesticcurrencydepositsatthecentral bankforoperationalpurposes(DepG,cur D ).Thelevelofthesedepositsdependsonthepublic wagebillandemployer’ssocialcontributions:
Andfinally,inlinewiththenationalaccountsdata,thegovernmentreceivesothertransfers (Transf i G)fromtheNFCsector,bankingsector,thecentralbankandtherestoftheworld. WedefinethesetransfersasafixedfractionoftotalproductionofPFandNFsectorgoods measuredinproducerprices:
Thus,thefinancingneedsofthegovernment(TFN G ,202)isthedifferencebetweenitstotal spendingandrevenues,takingintoaccountitsdepositaccumulation(
DepG,cur D ):
where F CB istheprofitsofthecentralbanktransferredtothegovernment,tobedefinedin thenextsection.
Aspartoffiscalpolicy,thegovernmentborrowsafixedfractionofthetradedeficitasFXloans (LG FX , 203),inordertoprovidetheeconomypartofitsFXneeds.Weassumethatthereisno rationingonpublicFXborrowingduetohighercountryrisk.
Theremainingpartofthepublicdeficitisfinancedbyissuingdomesticcurrencybonds (BG):
Thecentralbankimplementsapureinflation-targetingTaylorRuletodeterminetargetpolicy rate(itar p , 205):
pointintime(BG CB , 207):
RCB FX )isequaltothetotalFXaccumulationof thecountry(RFX )lessofbankFXreserveaccumulation(RB
ThebankdoesnotearnanyinterestrateonitsFXreserveholdings.Forsimplicity,weassume awayemploymentandotheroperationalcosts.Thus,centralbankprofits(F CB
by
Householdsincomeiscomposedofproductiveincomeandfinancialincome.Productive income(YDH P , 210)includesafter-taxwagepayments,aftertaxagriculturalmixedincome andgrossoperatingsurplus,transfersfromthegovernment,socialsecurityreceiptsminus workers’socialsecuritycontributions.
, 211)consistsofinterestpaymentsonhousehold savings,dividendsfromNFCsandbanks,interestincomeongovernmentbondsheldby householdsandremittanceslessofinterestpaidonhouseholdloans(takingintoaccount non-performingloans),comissionsandnetinsurancecosts.
Weassumethatnon-performingloansrateforhouseholds(βH npl, 212)followsthegeneral non-performingloansrate,definedabovein(111).
Householdshaveatwo-stagedecisionmakingprocesstodetermineconsumptiondemand foreachsector’sproducts.Inthefirststage,theydecideonatargetaggregatenominal consumption(ConTar , 213)viatheirmarginalpropensitytoconsume(mpc, 215)outoftheir totalincome;
Themarginalpropensitytoconsumedependsontherealinterestrateonhouseholddeposits andfollowsasigmoidalfunction,withitslowerboundgivenby LBMPC , inflectionpointby MP
Atthesecondstage,householdsallocatetheirconsumptiontoagriculture,processedfood andnon-foodgoods.ThisallocationfollowsaLinearExpenditureSystemspecification:
26Thus,monetarytransmissionmechanismoperatesviahighernominaldepositrates,whichincreaserealdeposit rates,reducemarginalpropensitytoconsumeanddampendemand.Alowerdemandfeedsintolowerproducer pricemarkups,slowingdownpriceinflation.
where rca,rcpf and rcnf respectivelydenotetheminimumlevelsofconsumptionofagricultural,processedfoodandnon-foodgoods.LESallowsfornon-homotheticdemand,implying thatfooddemandislesslikelytobeoverestimatedastheincomeshareofminimumfood consumptionfallswithgrowingincomes.However,LESalsoviolatesEngel’slawthatmarginal incomeelasticitiesoffoodmustdecreasewithgrowingincome,whereastheLESspecification aboveimpliesfixedmarginalbudgetshares.Wethereforeadjusttheparameters eps1 and eps2 inordertoensurethatthiselasticityfallsasrealconsumptionofhouseholdsgrow.
Theconsumerpriceindexforhouseholds(CPI, 225)isgivenby:
,229),whichisdeterminedasafractionof theirgrossdisposableincome(intheformofhousinganddurablegoods).
thegrowthrateofpublicinvestment27.Wespecifyasigmoidfunctionforthisrelationship, withalowerboundat LB
Unemploymentisdefinedovertheactivelabourforce,determinedbytheparticipationrate part andpopulation(Pop)
Inordertodeterminetheevolutionofthenominalexchangerate,westartbyspecfying thedemandandsupplyofFXintheeconomy.ThedemandforFX(DFX , 252)dependson nominalvalueofimportsinforeignexchange(IM, 254),theincomeaccountofthebalance ofpayments(IA, 257)andthebankdemandforFXreserves(RB FX ):
Ontheotherhand,supplyofFX(SFX , 253)isgivenbynominalvalueofexportsinforeign exchange(X, 255),crossborderborrowingbybanksandthegovernment,transfersfromthe restoftheworldtothegovernment,remittances(Rem)anddepositsflowbyrestoftheworld totheTunisianeconomy(DepW FX + DepW D /eN ):
Thechangeindepositholdingsoftherestoftheworldindomesticcurrency(DepW D , 264)and FX(DepW FX , 263)arefixedfractionsofremittances:
Thecurrentaccountbalance(CurAC, 265)canthenbedefinedas:
TheFXaccumulationofthecountry(
, 266)ateachpointintimeis:
Andfinally,wedefinenominalGDP(NomGDP, 267)fromthedemandside:
where FISIM H (268)istheFinancialIntermediationServicesIndirectlyMeasuredforhouseholdsanditiscomputedas:
Theresultingmodelisa differentialalgebraic system,whichcanbereducedtoan84dimensionaldifferentialequationsystem.Thestatevariablesandtheirinitialvaluesare reportedbelow.
Beginningfromendof2017forwhichwecouldobtainthelatestdetaileddataonintegrated economicaccounts,wesimulatethemodelusingtheprogramMathematica. Duetothe lackofexplicitdifferentialequationsforCPIinflationin(228)andgrowthrateofnominal GDP(267),whichappearinvariousequations,wecannotutilizethewell-knownRunge-Kutta algorithmforoursimulations.Thus,weimplementthe”EquationSimplification:Residual” methodin-builtinMathematica,whichcanproviderobustsimulationresultsinsuchcases. Thealgorithmisalsoefficientwithstiffdifferentialequationsystemsandstopsthesimulation ifthesystemdisplayssuchbehaviour.Wehavenotencounteredanysuchstiffnessinour exercise.
TheTransactionsFlowMatrixpresentedinthemaintextisdefinedintermsofnominaldomestic currencyvaluesandagroupofvariablesaredefinedeitherasrealorinforeigncurrency. Thus,thissectionpresentsthedefinitionsusedintheTFMforconsistency.
Calibratedtotheweightrangein BankforInternationalSettlements (2017) of 1
SettoavalueinlinewithEUTier1 CapitalAdequacyRatio of 2
Targetcapitaladequacyratio0.1595
Scalingparameterincapitaladequacyratio0.06Settoarealisticvalue of 3
Speedofadjustmenttotargetcapitaladequacyratio0.1Settoarealisticvalue
Partofbanksequitiesheldbytherestoftheworld0.4156CalibratedtoSNA(2017)
divrate B w
Partofbanksequitiesheldbytherestofthegovernment0.4080CalibratedtoSNA(2017)
divrate B G
Partofbanksequitiesheldbytherestofhouseholds0.1764CalibratedtoSNA(2017)
divrate B H
CalibratedtoIMFBankingSectorStatistics(2017)
0.2739
Requiredreservesratioforhouseholddeposits(includingcash&coindemand)indomesticcurrency
Employers’socialsecuritycontributionsratebyPFsector0.251CalibratedtoSNA(2017)
Employers’socialsecuritycontributionratebyAgriculture0.251CalibratedtoSNA(2017) τ
τ
Employers’socialsecuritycontributionsratebyNFsector0.251CalibratedtoSNA(2017)
τ
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