Regional Holistic Model

RHOMOLO is a recursively dynamic spatial computable general equilibrium (spatial CGE) model used to simulate the sector-, region-, and time-specific impact of EU policies and to provide support to policy makers in the evaluation of investments, reforms, and structural changes in the economy.

The current version of RHOMOLO (v3) covers 267 EU NUTS 2 regions and one residual Rest of the World region, disaggregating their economies into ten NACE rev.2 sectors entailing a constant effort on data updating and maintenance. All the monetary transactions in the economy are included in the model resulting from agents taking optimising decisions. Goods and services are consumed by households, governments, and firms, and are produced in markets that can be either perfectly or imperfectly competitive. Spatial interactions between regions are captured through costly trade matrices of goods and services and factor mobility through migration and investments. This makes RHOMOLO particularly well suited for analysing policies related to investments in human capital, transport infrastructure, and innovation.

The RHOMOLO model has been developed by the JRC in collaboration with the Directorate-General for Regional and Urban Policy (DG REGIO). The explicitly modelled spatial dimension makes it a unique tool for territorial impact assessment. 

An up-to-date list of policy applications and publications of the model can be found here.

The latest RHOMOLO Newsletter containing the most recent activities of the Regional Economic Modelling group can be found here.

The RHOMOLO webtool (a simplified version of the model to carry out some simple policy exercises) can be found here. Please note that the webtool should not be used for real policy analysis, only the fully-fledged RHOMOLO model can be used for that purpose.

In the tradition of Computable General Equilibrium (CGE) models, RHOMOLO relies on an equilibrium framework à la Arrow-Debreu where supply and demand depend on the system of prices. Policies are introduced as shocks. After a shock, the system moves to a new equilibrium with adjustments driven by optimal supply and demand behaviours. RHOMOLO, as all CGE models, therefore provides an evaluation of the interaction effects between all agents through markets, imposing full system consistency. The type of analysis is a scenario analysis, in which the results of simulations including policy shocks are compared to a baseline scenario with no shocks.

Given the regional focus of RHOMOLO, particular attention is devoted to the explicit modelling of spatial linkages, interactions, and spillovers between regional economies. For this reason, models such as RHOMOLO are referred to as Spatial Computable General Equilibrium (SCGE) models.

Each region is inhabited by households aggregated into a representative agent with preferences characterised by love for variety. Households derive income from labour (in the form of wages), physical capital (profits and rents), and other financial assets, as well as from government transfers (both national and regional). Factor mobility can be either switched off or on depending on the needs of the analysis to be carried out. The income of households is spent on savings, consumption, and taxes.

Firms in each region produce goods that are sold in all regions and consumed by households and governments. Other firms --either in the same or in other sectors-- can also use such goods as inputs in their production processes. Transport costs for trade between and within regions are assumed to be of the iceberg type and are sector- and region-pair specific. The market structures of the industrial sectors in each region can be modelled as either perfectly competitive or imperfectly competitive (the latter can be characterised as monopolistic competition, Cournot oligopoly, or Bertrand oligopoly). The number of firms in each sector and region is empirically estimated through the national Herfindahl indices, assuming that all the firms within one region share the same technology. Given their higher weight in the price index, firms with higher market shares are able to extract higher mark-ups from consumers than their competitors, and, since market shares vary by destination market, also mark-ups vary by destination market.

Moreover, a simplified version of RHOMOLO equivalent to the Leontief Input-Output model is available: RHOMOLO-IO is a linear version of the model capable of delivering a multipliers' analysis at a sectoral level potentially more detailed than that of the full RHOMOLO model.

RHOMOLO requires a number of calibrated inputs and exogenous parameters in order to function. For example, the interest rate is set to 0.04 and the rate of depreciation of private capital is set to 0.15. More in general, the parameters related to the elasticities of substitution both on the consumer side and on the producer side are either based on similar models or derived from the econometric literature.  

More information on model inputs and parametrisation is available in section 4 "Data, calibration and elasticities" of the latest model description written by Lecca et al. (2018) and available here.