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Article (07/03/2008)

Elaboration of a regional projection model. A first application of the HERMREG model to the national economic outlook 2007-2012

In January 2008, the results of an initial exercise aimed at breaking down the national economic projections for the period 2007-2012 into regional projections were published. This study is the result of a collaboration between the Federal Planning Bureau, the Brussels Institute for Analysis and Statistics (IBSA), the Research Centre of the Flemish Government (SVR) and the Walloon Institute for Evaluation, Prospects and Statistics (IWEPS).

These four institutions developed an initial version of a macroeconomic, sectoral and regional model (HERMREG) that allows the results of a national economic projection to be disaggregated into projections for the three Belgian regions.

HERMREG is a macroeconometric, multisectoral and multiregional model using a top-down approach. Regionalisation keys are computed and applied to the national medium-term forecast produced by the national HERMES model in order to obtain regional projections. These keys are determined in HERMREG by combining two methods: a shift-share method and multivariate regressions.

More precisely, the shift–share method is used to decompose the growth of a certain variable in a certain branch from a certain region into:
  • the national sectoral growth rate of this variable, the medium-term evolution of which is known from the national HERMES model; and
  • a (sectoral) differential growth rate, for which the medium-term evolution has to be computed. This differential shift component is attributed to region-specific characteristics and other explanatory variables that are econometrically identified in HERMREG via regression equations. These regression equations then serve to produce forecasts of the differential growth.

The final step consists of rescaling the obtained regional results so that the sum of the regional results matches with the national HERMES forecast. In its present version, the HERMREG model contains about 2,700 equations, of which about 230 are estimated.

The results obtained by using this initial version of HERMREG were presented in January 2008. This first exercise starts from the national economic outlook 2007-2012 published in May 2007. Note that since the publication of this national forecast, the international environment, as well as the national short-term situation has changed, which has induced a not negligible modification of GDP growth for the year 2007. The forecast for 2008 should also change with the new context. Note, however, that the national economic outlook dated May 2007 is the last complete medium-term projection available with a 5 year-horizon.

The results, computed for each region, concern economic growth (regional value added per branch and gross domestic product of each region), regional investments, productivities per head, real wage costs per head, regional employment as well as regional unemployment, net commuting flows, and employment rates. All regional results are presented for the period 2006-2012 and are completely coherent with the national results presented in May 2007.

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