Policy Simulation

Model Specification Adjustment

In order to simulate effects of improvement on the ROI, the original CQMM was made some adjustments. The major adjustments are mentioned as follows:

First, equations in the investment module are revised. The investment equation in the original model was specified by the FAI from various sources of funds, not including the FAI from private and non-private investment. In the new equation, the FAI are classified as the private investment and the SOEs’ investment to explain gross capital formation and GDP. As current statistical data based on surveys can only be used to measure the ROI of industrial enterprises, we introduced the variable of private investment in industrial sectors as the intermediate indicator of variable of private investment. In addition, in order to distinguish the private investment and the SOEs’ investment, we assume that the ROI of industrial enterprises can only affect the private investment in industrial sectors, but cannot affect the SOEs’ investment (see Fig. 3.3).

Secondly, for convenience, the ROI variable is assumed as exogenous, its conduction route is mainly via tax adjustment, including the decline of taxes less subsidies on production and imports, and the decrease of income tax. It is noteworthy that the tax adjustment usually has endogenous effects on different modules of the model. For we have studied the effects of tax adjustment in the previous report based on CQMM, it is reduced to exogenous changes on this report.

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