JOINT RESEARCH CENTRE

Regional economic analysis and modelling

Economic and social cohesion are major pillars of the European welfare state and a large part of the EU budget is devoted to maintaining and strengthening them through support at the regional level. Impact assessment of EU regional policy is complex, not least because it affects a wide range of macroeconomic variables, including GDP, employment, productivity, budget deficit and trade balance which are equally affected by a large number of other factors. Interventions have an impact on demand since programmes generally result in increased public expenditure though also private spending in many cases, and on the supply-side since they add to investment in infrastructure, plant and equipment and technology. Policies, in addition, have direct and indirect effects. For example, transport projects boost demand directly in the short-term and improve communication links, which should, indirectly, have a positive effect on the expansion of businesses and so GDP in the longer-term. At the same time, interventions might increase the demand for labour and materials which could lead to higher wages and prices, so reducing cost competitiveness and adversely affecting GDP. Equally, economic performance is affected by a wide range of internal and external developments along with regional policy interventions. The specific impact of the latter, therefore, cannot be identified simply by looking at the data for GDP and other economic variables.

In order to capture all direct and indirect effects of the policy and assess the impact which can be attributed to it, it is necessary to compare how the economy would have developed in absence of Cohesion Policy with how it developed in practice. This requires the use of macroeconomic models which capture the way that economies function in order to assess what would have happened without the Policy (i.e. to generate a ‘baseline’ scenario) which can then be compared with the actual course of the economy. The objective of the Regional Economic Modelling (REMO) Project is to provide analytical support to EU policymaking by developing a regional model.

For more information contact d'Artis Kancs – Team Leader of the Regional economic analysis and modelling project. 

RHOMOLO Model

RHOMOLO is a dynamic spatial general equilibrium model of the European Commission. It is developed and used by Directorate-General Joint Research Centre (DG JRC) in cooperation with Directorate-General for Regional and Urban Policy (DG REGIO) for policy impact assessment and provides sector-, region- and time-specific model-based support to EU policy makers on structural reforms, growth, innovation, human capital and infrastructure policies. The current version of RHOMOLO covers 267 NUTS2 regions of the EU27 Member States and each regional economy is disaggregated into NACE Rev. 1.1 industrial sectors. Goods and services are consumed by households, government and firms, and are produced in markets that can be perfectly or imperfectly competitive. Spatial interactions between regions are captured through trade of goods and services (which is subject to trade costs), factor mobility and knowledge spill-overs. This makes RHOMOLO particularly well suited for analysing policies related to human capital, transport infrastructure, R&D and innovation. RHOMOLO is built following the same micro-founded general equilibrium approach as the QUEST model of Directorate-General for Economic and Financial Affairs (DG ECFIN), and is often used in combination with it.

For more information visit the Rhomolo model site.