Macro-regional evaluation of the Structural Funds using the HERMIN modelling framework

(a) Economic openness, exposure to world trade, and response to external and
internal shocks;

(b) Relative sizes and characteristics of the traded and non-traded sectors and their
development, production technology and structural change;

(c) Wage and price determination mechanisms;

(d) The functioning and flexibility of labour markets with the possible role of
international and inter-regional labour migration;

(e) The role of the public sector and public debt, and the interactions between the
public and private sector trade-offs in public policies.

To satisfy these requirements, the HERMIN framework is designed as a
macroeconometric model composed of four sectors, namely: manufacturing (a mainly
traded sector), market services (a mainly non-traded sector), agriculture and
government (or non-market) services that incorporates the theoretical underpinning of
a small open economy model with a Keynesian role for domestic demand². This level
of disaggregation is the minimum necessary to identify the key sectoral shifts in a
developing (regional) economy over the years of the Structural Funds programme.
The model is made up of three main blocks:

A supply-side (determining output, factor inputs, wages, prices, productivity, etc.);

An absorption side (determining the expenditure side of the national accounts such as
consumption, stock changes, etc.);

An income distribution side (determining private and public sector income).

Conventional Keynesian mechanisms are at the core of the HERMIN model. Thus,
the interaction of the expenditure and income distribution sub-components generate

² Available data do not permit the identification of traded and non-traded sectors precisely. The use of
manufacturing and market services serves as a rough approximation.

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