Back Matter

Back Matter

Author(s):
Roberto Cardarelli, and Lusine Lusinyan
Published Date:
November 2015
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    Appendix 1 IMF’s Global Economy Model

    The Global Economy Model is a micro-founded dynamic stochastic general equilibrium model of the new open economy paradigm outlined in Lalonde and Muir (2007) and Pesenti (2008).1 Depending on the analysis, different versions of the Global Economy Model are used; for example, a three-region version in Chapter 3 and a six-region version in Chapters 2 and 8.

    There are three major agents in an economy—firms, households, and the government. Firms combine intermediate goods to create investment or combine them with the energy good (retail fuels) to create consumption.2 Firms produce nontradable and tradable intermediate goods, energy (oil and natural gas), nonenergy commodities, and retail fuels. The production of each sector is assumed to be monopolistically competitive, such that each firm is able to set a price above its marginal cost, allowing a markup. Households supply labor and consume final goods (domestic or imported), and are either liquidity-constrained, consuming only from current income, or forward-looking with the ability to save. The government consists of a fiscal authority, which follows a standard balanced budget rule, and a monetary authority, which follows a core inflation targeting rule.

    For each region’s external sector, all the bilateral flows of exports and imports of energy, commodities, and tradable intermediate goods are tracked. Internationally traded net foreign assets are assumed to be denominated in U.S. dollars. External imbalances are bounded by the assumption that regions are targeting a specific ratio of net foreign assets to GDP. The cost of holding an excess balance of assets puts upward pressure on each region’s bilateral U.S. dollar real exchange rate (which is also determined by a standard uncovered interest rate parity condition). This leads to a decrease in the current account in the short term, eliminating the external imbalances.

    To match the persistence observed in the data, the model includes real adjustment costs and nominal rigidities that are allowed to differ across regions. Real adjustment costs in capital, investment, labor, and imports are assumed. Along with the presence of the fixed factor of production, real adjustment costs are the key to the speed of adjustment in the production and demand of energy and commodities, as well as the movement in their prices. Finally, nominal rigidities govern the setting of wages and prices of intermediate goods.

    A special emphasis is placed on the energy sector. Each region has firms that produce energy by combining capital, labor, and crude oil reserves. Energy can be either used as an input (along with a capital-labor bundle and commodities) to produce intermediate goods, traded across regions, or further processed into retail fuels, such as heating fuels and automobile gasoline. The benchmark calibration allows for perfect mobility and substitution of energy across regions, which can be modified to analyze scenarios with segmented energy markets.

    Lalonde, R., and D. Muir. 2007. “The Bank of Canada’s Version of the Global Economy Model (BoC-GEM).” Bank of Canada Technical Report No. 98 (Ottawa: Bank of Canada), and Pesenti, P. 2008. “The Global Economy Model: Theoretical Framework.” IMF Staff Papers, Vol. 55 (2). April 2008.

    Such an arrangement for production of consumption goods allows the identification of both headline consumer price index inflation and core consumer price index inflation, which excludes the effect of changes in energy prices.

    Index

    Page numbers followed by b refer to boxed text, f figures, and t tables.

    A

    • Advanced recovery techniques, 62

    • Advanced Research Projects

      • Agency-Energy, U.S., 161–162

      • Alberta Energy Regulator, 159–160

      • Asian–North American trade, 131

    B

    • Bakken formation, 12b, 66

    • Blackout (2003), 155

    C

    • Canada

      • distribution of benefits of energy integration scenarios, 140, 141

      • economic impact of oil production, 3, 33–34, 34f, 39–45, 47

      • effects of U.S. energy demand, 51

      • energy sector investment, 33, 33f

      • energy trade, 40–41, 41f, 132, 133, 142f, 151–152, 153

      • energy transport infrastructure, 3, 34–36, 40, 47, 136, 152–153

      • future challenges in energy sector growth, 3, 47

      • indirect spillovers from energy sector, 36–38, 37f

      • input-output analysis of energy sector, 48–51, 50t

      • labor productivity, 99, 99f

      • manufacturing sector performance, 4–5, 95, 96f

      • oil and natural gas production, 1–2, 3, 31–32, 32f, 32t

      • potential outcomes of increased energy production, 31

      • projected energy production, 40–43, 42f

      • size of energy sector, 32

      • trade patterns and trends, 4–5, 95

      • U.S. investment in energy sector of, 133–134

      • See also Canada’s export performance; North America

    • Canada’s export performance

      • causes of declining competitiveness, 98–99

      • energy sector, 95, 96, 97, 97f

      • exchange rate and commodity price linkages in, 4–5, 95–96, 98–101, 101f, 102t, 108

      • future challenges and opportunities, 108

      • loss of competitiveness, 95

      • loss of market share in United States, 103–108, 104t, 106–107t

      • manufacturing sector, 95, 96–98, 98f, 105

      • patterns and trends, 4–5, 95, 96–99, 108

      • U.S. trade, 98, 108, 131

    • Canada-United States Free Trade Agreement, 96, 154

    • Canadian Oil Sands Innovation Alliance, 162

    • China

      • Canada–U.S. trade and, 4–5, 103, 105–108

      • manufacturing sector, 79

      • Mexico–U.S. trade and, 113–114

      • U.S. trade, 98, 99f

    • Clean Energy Dialogue, 155, 161

    • Climate change, 2, 151, 158, 161, 162–163, 164

    • Coal industry, 36

    • Cost of energy

      • advanced recovery techniques, 62

      • cost of finding new reserves, 62

      • differences across North America, 134–135, 136f

      • effects of increased energy production in United States, 10, 19–21, 22, 27, 28f

      • effects of lower prices in North American manufacturing sector, 138–139

      • effects of unconventional extraction technologies, 1

      • future of North American integration and, 150

      • future of U.S. manufacturing sector growth and, 77

      • global effects of Mexico’s production, 69–70

      • growth of U.S. manufacturing sector and, 2, 4

      • outcomes of global and regional integration, 138

      • in partially segmented markets, 23–24, 25f, 40, 45, 46f

      • patterns and trends, 1, 35f, 85f, 87–89, 119–120

      • prospects for economic integration, 5–6

      • sensitivity of Mexico’s manufacturing sector, 111, 114–116, 116t, 117t, 118t

      • structural modeling of increased U.S. energy production, 15–16

      • U.S. ban on crude oil exports and, 137

      • U.S. share of manufacturing imports and, 114f

    D

    • Deepwater reserves, Mexico’s, 56, 57–58, 59, 62, 63f, 72

    • Department of Energy, U.S., 157, 161

    E

    • Eagle Ford formation, 12b, 58, 66, 67f, 152

    • Efficiency standards, 160–161 Electricity generation and distribution

      • international quality comparison, 112f

      • in Mexico, 54–55, 68–69

      • Mexico’s reforms, 56, 67–69, 72, 111

      • North American integration, 133, 152, 153

    • Electricity prices

      • goals of Mexico’s energy reforms, 53, 72, 119–120, 125

      • growth of U.S. manufacturing sector and, 2

      • international comparison, 111, 119f

      • in Mexico, 5, 111, 135

      • sensitivity of Mexico’s manufacturing sector, 5, 53, 69, 115–116, 122–123, 122t

      • unit labor cost response to, 123, 124f

    • Energy East project, 153

    • Energy Regulatory Commission of Mexico, 159

    • ENERGY STAR program, 160

    • Environmental considerations, 2, 12, 151, 159–160, 161, 162–163

    • European–North American trade, 131

    • Exchange rates

      • Canada’s commodity prices and trade performance linkage, 95, 98–101, 101f, 102t, 108

      • Canada’s loss of market share in United States and, 103, 105

      • effects of increased energy production, 139

      • growth of U.S. manufacturing sector and, 77, 86, 89, 94

    F

    • Federal Electricity Commission (Mexico), 54, 55, 56, 68–69, 72

    • Federal Energy Regulatory Commission, U.S., 159

    • Fiscal policy

      • Mexico’s energy reforms and, 71

      • to mitigate environmental harms of energy production, 2

      • structural modeling of increased U.S. energy production, 15

    • Foreign direct investment

      • integration of North American energy market, 133–134

      • to support Mexico’s energy production, 62–64, 64f

    • France, 80

    G

    • Gasoline prices, 134–135, 134f

    • Germany, 80

    • Global Economy Model

      • features, 167–168

      • integration scenarios, 138

      • modeling economic effects from Canada’s energy sector, 39–45, 39b

      • modeling macroeconomic effects of U.S. energy boom, 9, 14–22, 24–25, 27–29

    • Global Integrated Monetary and Fiscal model, 9, 14–22, 24–25, 27–29

    • Greenhouse gas emissions, 162–163

    • Group of Seven countries, 79–80, 81, 83f

    • Group of Twenty countries, 92–93

    • Growth

      • Canada’s energy production and, 3, 33–34, 34f, 43–45

      • distribution of benefits of global energy integration, 139–141

      • effects of increased energy production in United States, 2–3, 10, 19–21, 20f 22, 23f, 25–26, 25f

      • investment in Canada’s energy sector and, 38

      • potential contributions from U.S. manufacturing sector, 90–93, 92t

      • projected effects of increased energy production in Canada, 31

      • projected impact of Mexico’s 2013 energy reforms, 3–4, 69, 70f

      • welfare effects of integration scenarios, 140–141, 141t

      • Gulf of Mexico deepwater reserves, 57–58, 59, 59f

    H

    • Haynesville formation, 1

    • Households

      • modeling savings and consumption behaviors, 16–18, 22

      • projected macroeconomic effects of Mexico’s energy reforms, 70–71

      • Hydraulic fracturing. See Unconventional extraction

    I

    • Income, manufacturing-to-output ratio patterns and, 90–91

    • Infrastructure, energy transport

      • Canada’s, 34–36, 40, 45, 47

      • current North American integration, 152–153

      • environmental review, 159

      • Mexico’s electrical grid, 68–69, 120, 121f, 125

      • natural gas pipelines in Mexico, 5, 54, 65–66, 66f, 67, 67f, 71, 72, 111, 120, 125, 136

      • prospects for North American integration, 136, 137

      • regulatory oversight, 159, 160

      • strategies for promoting North American integration, 158–159

      • United States, 13

    • Input–output analysis

      • of Canada’s energy sector, 48–51, 50t

      • of North American production chains, 134, 135f

      • of U.S. energy boom and manufacturing growth, 89–90

    • Intended Nationally Determined Contributions, 162

    • Interest rates, 17

    • Investment

      • in Canada’s energy production, 33, 33f, 51

      • in Canada’s energy production, spillovers from, 36, 38

      • projected energy sector, 145f

      • to support Mexico’s energy production, 62–64, 63f, 64f

    • Italy, 80

    L

    • Labor market

      • Canada’s productivity gap, 99, 99f

      • future of U.S. manufacturing sector growth and, 77

      • projected effects of increased energy production in United States, 20–21, 22

      • spillover effects from Mexico’s energy reforms, 123–124, 124f

      • U.S. manufacturing sector, 4, 81–82, 85, 86, 87, 89

    M

    • Manufacturing sector

      • Canada’s export performance, 95, 96–98, 98f, 105

      • durable versus nondurable goods, 83f, 84f

      • effects of lower energy prices, 2, 4, 138–139

      • energy consumption, 139, 139f

      • energy efficiency, 160–161

      • inputs from non-NAFTA countries, 136

      • integration of North American markets, 131, 134, 135f

      • international comparison, 79–81, 79f, 83f, 84f

      • recent patterns and trends, 4–5

      • spillovers from Canada’s energy sector to, 36

      • See also U.S. manufacturing sector

    • Manufacturing-to-output ratio, 90–93

    • Marcellus shale, 1, 12b

    • Mexican Oil Stabilization Fund, 56

    • Mexican Secretariat of Energy, 157

    • Mexico

      • antitrust law, 125

      • current challenges in energy sector, 53–55

      • deepwater and shale oil, 56, 57–58, 59, 62, 63f, 72

      • distribution of benefits of energy integration scenarios, 140, 141

      • electricity generation and distribution, 54–55, 56, 68–69

      • energy composition and costs, 119f

      • energy losses, 120, 121f

      • energy prices, 5, 54–55

      • energy trade, 54, 55f, 64–67, 71, 132, 133, 142f, 152, 153, 154

      • foreign direct investment in energy sector of, 134

      • investment to support energy production, 62–64, 63f, 64f, 72, 120

      • manufacturing sector performance, 5

      • natural gas pipelines, 5, 54, 65–66, 66f, 67, 67f, 71, 72, 111, 120, 125, 136

      • oil and natural gas production, 1–2, 53–54, 54f

      • oil field exploration and technology investment, 2, 72

      • potential energy production scenarios, 58–62, 59f, 60f, 61f

      • proven and potential energy reserves, 53, 56–58, 57f

      • trade patterns and trends, 5, 113–114, 131

      • See also Mexico’s 2013 energy reforms; Mexico’s manufacturing sector; North America

    • Mexico’s 2013 energy reforms

      • current state of implementation, 58, 72

      • domestic content rules, 56

      • electricity market and, 56, 67–69, 72, 111, 119–120, 125

      • future challenges, 72

      • goals, 3, 53, 72, 111

      • implications for manufacturing sector, 111, 114–116

      • increased foreign direct investment and, 134

      • indirect spillover effects, 123–124

      • macroeconomic impact of, 69–71, 70f

      • natural gas transport infrastructure, 67, 67f, 72, 136

      • North American integration and, 154

      • principle provisions of, 55–56

      • projected economic outcomes of, 3–4, 5, 122–123, 122t, 125

      • projected energy production and, 58–62

      • projected investment resulting from, 64, 65t

      • regulatory framework, 56, 125

    • Mexico’s manufacturing sector

      • effects of energy reforms, 114, 125

      • energy consumption, 115t

      • export patterns, 111

      • indirect spillover effects from energy reforms, 123–124, 124f

      • patterns and trends, 111, 112–114, 113f

      • projected effects of lower electricity prices, 122–123, 122t

      • sensitivity to energy prices, 5, 53, 69, 114–116

      • threats to competitiveness, 111

    • Mining-energy industry, 33f, 37f, 135f, 136

    • Monterey/Santos shale formation, 12b

    N

    • National Energy Board of Canada, 157, 159

    • National Hydrocarbon Commission of Mexico, 159–160

    • Nationally Appropriate Mitigation Measures, 161

    • Natural gas

      • Canada’s projected production, 38f, 43

      • cost of finding new reserves, 62

      • global effects of increased U.S. production, 10

      • integration among North American markets, 132

      • Mexico’s imports, 54, 55f, 64–65, 66, 71, 122–123, 125, 152

      • Mexico’s potential resources, 58, 59, 60f, 61f, 62

      • Mexico’s production, 1, 53, 54, 64–65

      • Mexico’s transport infrastructure, 5, 54, 65–66, 66f 67, 67f, 71, 72, 111, 120, 125, 136

      • partially segmented energy markets, 23–24, 25f

      • patterns and trends in North America, 32t

      • price trends, 1, 85f

      • price variation across North America, 135

      • projected production, 144f

      • structural models for analyzing economic outcomes of increased U.S. production, 9, 14–19

      • United States–Canada trade, 40–41, 41f, 152

      • U.S. production patterns and trends, 1, 10–11, 11f, 85f, 119–120

      • See also Unconventional extraction

    • Natural Resources Canada, 161

    • Nigeria, 2

    • North America

      • energy consumption by manufacturing sector, 139, 139f

      • energy price variation in, 134–135

      • energy self-sufficiency, 150, 155–156

      • energy trade, 132–133, 134, 137, 142f, 151–154

      • energy transport infrastructure, 136

      • foreign direct investment in energy markets of, 133–134

      • future challenges and opportunities in energy development, 149–150, 164

      • input–output analysis of energy and manufacturing sectors, 134–135

      • natural gas extraction, 1, 32t

      • potential economic impact of energy production, 2–4

      • projected oil production and supply, 144f, 145–146f

      • recent manufacturing sector performance, 4–5

      • trade patterns and trends, 4–5, 40–41, 41f

      • transport equipment sector, 78, 82f, 93, 98, 113, 134, 143f

      • See also Canada; Mexico; North American integration; United States

    • North American Electric Reliability Corporation, 155

    • North American Energy Ministers’ Working Group on Climate Change and Energy, 164

    • North American Energy Working Group, 155

    • North American Free Trade Agreement, 5, 96, 111, 112, 131, 149, 154–155

    • North American integration

      • current state, 131, 132–134, 135f

      • current state of energy relationships, 151–154, 164

        • distribution of benefits of, 140–141 harmonization of energy policies, 157–158

        • implications of closer energy market integration, 131–132

        • infrastructure assessment and planning, 158–159

        • institutional support and drivers of, 154–156

        • national security and public safety arrangements, 159–161

        • outcomes of regional and global scenarios, 137–141

        • prospects for, 5–6, 131, 137, 164

        • rationale for policy collaboration and, 150–151, 163, 164

        • strategies for deeper energy integration, 156–164

    O

    • Oil production

      • Canada’s projected, 42–43, 42f

      • cost of finding new reserves, 62

      • foreign direct investment in North America, 133–134

      • integration among North American markets, 132

      • Mexico’s potential, 57–62, 59f, 60f, 61f

      • partially segmented energy markets, 40, 45, 46f

      • patterns and trends, 1–2, 32t

      • projected, 144f, 146f

      • structural models for analyzing economic outcomes of increases in United States, 9, 14–19

      • trends in Mexico, 53–54, 54f

      • U.S. ban on crude oil exports, 5–6, 137

      • U.S. production patterns, 10–11, 11f

      • See also Unconventional extraction

    P

    • Pemex, 3, 53, 55, 56, 72, 134, 161

    • Pipelines

      • Canada’s capacity, 34–35, 40, 47, 152–153

      • construction challenges, 158, 159

      • United States, 13, 152

      • See also Mexico, natural gas pipelines

    Q

    • Quadrennial Energy Review, 158

    R

    • Rail transport, 40, 152–153, 160

    • Regulatory Cooperation Council, 160

    • Regulatory frameworks

      • competitive market development and, 155–156

      • future integration of North American energy systems, 151

      • infrastructure project review, 159, 160

      • Mexico’s energy reforms, 3, 53, 55, 56, 67, 68–69, 125

      • North American energy reliability, 155

      • North American safety and security, 159–160

      • pollution emissions, 162–163

      • prospects for North American harmonization, 131, 156

    • Reliability standards, 155

    • Renewable energy, 150

    • Research and development

      • cost of finding new reserves, 62

      • North American collaboration, 161–162

      • U.S. manufacturing sector, 4, 77

    S

    • Safety and security, 159–160

    • Segmented energy markets, 23–24, 25f, 40, 45, 46f

    • Service sector

      • spillovers from Canada’s energy sector to, 36

      • U.S. growth, 79f

    • Shale gas and oil

      • definition, 12b

      • development costs, 62, 63f

      • geographic distribution, 12b

      • Mexico’s production, 57–58, 57f, 59–60, 59f, 62, 72

      • production trends, 1, 85f, 86

      • projected growth, 19, 27, 58, 59–60, 59f, 86, 89

      • U.S. production, 4, 10–13, 11f, 12b, 13f 19, 24–25, 27, 66, 132, 152

      • See also Unconventional extraction

    T

    • Tax policy, 16–17

    • Technology and innovation, 161–162

    • Tight oil, 1, 12b, 89

    • Trade

      • Canada’s energy production and, 34, 34f, 40–41, 41f, 45, 47

      • current degree of North American integration, 131, 132–134

      • institutional arrangements to promote North American energy, 154–156

      • North American energy, 132–133, 142f, 151–154

      • patterns and trends, 4–5, 95

      • projected effects of increased energy production in United States, 19, 20f, 21, 22

      • spillover effects from Canada’s energy sector, 37–38, 37f

      • transport equipment, 93, 98, 143f

      • U.S. ban on crude oil exports, 5–6, 137

      • U.S. manufacturing sector export share, 77, 91–93

      • See also Canada’s export performance

    • Trans-Pacific Partnership Agreement, 131

    • Transport equipment sector, 78, 82f, 93, 98, 113, 134, 143f

    U

    • Unconventional extraction

      • Canadian patterns and trends, 31, 32, 32f, 32t

      • challenges and opportunities for North American countries, 149–150

      • costs, 62

      • determinants of future production from, 11–13

      • economic significance of, 1–2

      • environmental considerations, 162

      • future of economic integration in North America and, 5–6, 131–132, 137, 141

      • future prospects, 1, 89

      • growth of, 1, 10–11, 11f

      • growth of U.S. manufacturing sector and, 86, 89–90

      • indirect spillovers from, in Canada, 36–38, 37f

      • modeling global and regional integration scenarios, 138–141

      • policy collaboration in development of, 151

      • projected economic effects of, 2–3

      • structural models for analyzing economic outcomes of increases in United States, 9, 14–19

      • technology, 12b

    • United States

      • anticipated versus unanticipated move to energy self-sufficiency, 22, 23f

      • Canada’s loss of market share in, 103–108, 104t, 106–107t

      • composition of energy use, 119f

      • crude oil export ban, 5–6, 137

      • current account, 3, 10, 21, 22, 23f, 26

      • determinants of future energy production, 11–13

      • distribution of benefits of energy integration scenarios, 140, 141

      • energy demand effects on Canadian economy, 51

      • energy self-sufficiency, 9, 10, 13, 27

      • energy trade with Canada and Mexico, 40–41, 41f, 98, 99f, 131, 132, 133, 142f, 151–152, 153–154

      • energy transport infrastructure, 13

      • exchange rate, 4

      • import shares, 98, 99f

      • natural gas exports, 65–67, 66f, 71

      • oil and natural gas production, 1–2, 10–11, 11f

      • potential global impact of increased energy production in, 9–10

      • projected effects of transition to energy self-sufficiency, 18–22, 20f 23f 25–26, 27, 28f

      • projected growth in energy production, 11, 13, 13f

      • research and development investment, 4

      • sources of energy production, 11f 12b

      • structural models for analyzing energy production outcomes, 9, 14–19, 27–29

      • trade patterns and trends, 4–5, 21, 114f

      • trade with China, 103, 105–108

      • trade with Mexico, 112–113, 131

      • See also North America; U.S. manufacturing sector

    • U.S. Energy Information Administration, 157

    • U.S. manufacturing sector

      • determinants of future growth, 77, 89, 93–94

      • drivers of recent growth, 83–89, 87t, 90

      • durable versus nondurable goods, 78, 80f, 81, 81f, 82f 87, 88t

    • U.S. manufacturing sector economic significance of, 4, 77

      • employment and wages in, 77, 81–82, 87, 89

      • energy price trends and, 2, 4, 77, 86, 87–90

      • exchange rate patterns and, 77, 86, 89

      • export base diversification, 93, 94

      • export earnings, 77, 91–93

      • postcrisis growth, 2, 77–82, 79f, 80f, 81f, 82f, 83f

      • potential contributions to long-term economic growth, 90–93, 92t

      • research and development investment in, 77

      • subsector distribution of growth, 78, 89–90

      • wage patterns, 85

    V

    • Venezuela, 2

    W

    • Wages

      • growth of U.S. manufacturing sector and, 85, 86, 87

      • projected effects of increased energy production in United States, 21

    • Welfare effects of integration scenarios, 140–141, 141t

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