THREEME MODEL

ThreeME is built on a multi-sectoral representation of the economy, with a particular emphasis on the energy sectors.

ThreeME is released under the GPL v3 license. Further, every published scenario provides a downloadable zip file to reproduce its results.

Macroeconomic

ThreeME is a Computable General Equilibrium (CGE) model of neo-Keynesian inspiration, with hybrid economy-energy features.

Multi-sectoral
Open source
Model structure
 

A simplified overview of the model structure is schematized in Figure 1. The actual overview of the model structure is much more complex and is in fact our logo as shown on top of the home page. In the short term, ThreeME has the main characteristics of a standard neo-Keynesian macroeconomic model of demand in an open economy.

An important one is that demand determines supply. The demand is composed of (intermediate and final) consumption, investment and export whereas the supply comes from imports and the domestic production. As a feed-back with eventually some lags, the supply affects the demand through several mechanisms.

The level of production determines the quantity of inputs used by the firms and thus the quantity of their intermediate consumptions and investment which are two components of the demand. It determines the level of employment as well and consequently the households' final consumption.

Another effect of employment on demand goes through the wage setting via the unemployment rate which is also determined by the active population. The active population is mainly determined by exogenous factors such as the demography but also by endogenous factors: because of discouraged worker effects, the unemployment rate may affect the labor participation rate and thus the active population.

Figure 1: Structure of ThreeME

Price-wage dynamics
 

The unemployment rate is an important determinant of the wages dynamic which is defined by a Phillips curve. The inflationary property of the model is determined by the feedback loop between wages, production cost and prices. Prices are assumed to adjust slowly to their optimum level that corresponds to a mark-up over marginal costs. Consequently, wages, which affect production costs, affect directly prices. Prices have in return an impact on wages because of they are indexed on the consumer price. Production costs are also directly affected by prices via the cost of intermediate consumptions and of investment.

 

This dynamic between wages, cost and prices affects the demand through several canals. Wages affect the household consumption because they are an important part of their income. Prices and cost affect profits and thus sectors' debts level. But they affect the households' consumption and investment too, because they finance a part of the private debt of the economy. Another canal is the monetary policy which is defined by a Taylor rule. The European central bank determines the interest rate level based on the European level of inflation and unemployment. This has an effect on the demand via the negative effect of the real interest rate on consumption and investment.

Sectoral structure

The dynamic of prices is the driver of the substitution mechanisms of the model. The evolution of relative prices between imported and domestic goods defines the repartition between imported and domestic products to satisfy the internal (consumption and investments) and external (export) demand. The evolution of relative prices between types of goods and services defines the structure of consumption of the economy. Importantly for the analysis of environmental and energy policies, it defines the share of each energy and transport into (intermediate and final) consumptions.

 

ThreeME explicitly distinguishes between five types of transports and four types of energy (resp. red and yellow lines in Table 1). Energy intensity was the main criterion for the selection of the 24 sectors. This relatively high level of disaggregation is important to capture the complexity of the substitution mechanisms involved after a change in the relative price between energies. For instance, an increase in the oil price tends to lead to substitution from oil to the other energy in several ways. In addition to direct substitutions by producer and consumer, indirect effects occur via the increase of the production price of oil intensive sectors. This leads to intermediate and final consumptions structure less oil intensive. The decrease of the use of transport by road would be the most typical example.

Figure 1: Structure of ThreeME

Endogenous efficiency
 

ThreeME also accounts for endogenous energy efficiency and sobriety effects. In contrast with the substitution mechanisms, the reduction of a given energy consumption does not imply the increase of the use of another energy. Sobriety consists in refraining from consuming energy by for instance staying home during the weekend instead of taking the car or by lowering the heating temperature in the house. In general, sobriety leads to a decrease in the welfare of the consumer. In contrast, in the case of efficiency, the same welfare is achieved with a lower quantity of energy. Energy efficiency implies an investment in a more efficient technology by for instance switching from a high to a low oil consumption car or by using more efficient insulation techniques for the house. In the current version of model, endogenous efficiency phenomena are introduced through an explicit distinction between two types of housing and automobile investments: energy saving housing and "comfort" housing investments; low and high oil consumption cars.

 

In ThreeME, efficiency and sobriety phenomena decrease the consumer price since the share of energy into consumption decreases. This allows for capturing directly the so-called "rebound effect" in consumption behaviour often observed at the micro level (Bentzen, 2004; Sorrell and al., 2009). There is a rebound effect when the effective energy saving from an investment in energy efficiency is less than the energy saving expected ex ante because the consumer uses a part of the reduction of her energy bill to increase her energy consumption. A typical example is the case of certain poor households who live in badly insulated houses and set a low heating temperature to reduce their energy bill. After an insulation investment, they will have the tendency to increase the heating temperature of their house keeping their energy bill more or less constant. This effect is explicitly taken into account in the model: an energy efficiency investment decreases the consumer price and thus increases the real income which leads to a higher level of (energy) consumption.

Short and long-run dynamics

The short and medium run dynamic is largely driven by the demand side through multiplier and accelerator mechanisms. Because of the slow adjustment of price and quantity to their optimal value, the allocation of production factors is sub-optimal in the short and medium run. The long term is driven by the supply constrain. All adjustment processes are achieved: there is no error of anticipation and the effective quantities coincide with the optimal ones. The prices are fully adjusted and all markets are in equilibrium. The unemployment reaches its structural level.

 

The economy thus converges toward a stable equilibrium growth path a la Solow (1956) where all real variables grow at the same rate defined as the sum of the growth rates of the technical progress and of the population. Per capita real variables grow thus at the same rate as the technical progress. All prices grow at the rate of inflation which is defined by the exogenous rate of inflation in the rest of the world. The endogenous dynamic of the model is determined by capital accumulation of households and firms, the specification of the anticipation and of the adjustment dynamic.

Download full description

 

ThreeME V3 (2019): A full description of ThreeME version 3: Multi-sector Macroeconomic Model for the Evaluation of Environmental and Energy policy / Frédéric Reynès, Gaël Callonnec, Aurélien Saussay, Paul Malliet, Gissela Landa, Adeline Gueret, Jinxue Hu, Hervé Gouëdard

ThreeME V2 (2013): A full description of the Three-ME model: Multi-sector Macroeconomic Model for the Evaluation of Environmental and Energy policy / Gaël Callonnec, Gissela Landa, Paul Malliet, Frédéric Reynès, Yasser Yeddir-Tamsamani

 

ThreeME v1: Presentation of the Three-ME model: "Multi-sector Macroeconomic Model for the Evaluation of Environmental and Energy policy" / Frederic Reynes, Yasser Yeddir-Tamsamani and Gael Callonnec (OFCE, May 2011).

 
 
 
 
 
Download the ThreeME model
 

ThreeME is an open source model and the model can be downloaded here. An Eviews Workfile of ThreeME v2 can be downloaded here. This version was applied in the study "Towards a low carbon growth in Mexico: Is a double dividend possible? A dynamic general equilibrium assessment". See Publications for the full paper. ThreeME v3 is currenly under development and we plan to publish the full Eviews code of version 3 next to the Eviews Workfile.

 
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© 2016-2019 Sciences Po (OFCE), NEO

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