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FISK NK Model

Abstract

This medium-sized New Keynesian Model (NK) is built to assess the macroeconomic consequences of fiscal policy in a small open economy within a monetary union. The model is characterized by a large fiscal block, multiple industries, Calvo pricing, habit persistence and variable capacity utilization.

Working paper

Technical model description

FISK OLG Model

Abstract and links

This paper provides the technical description of a numerical overlapping generations (OLG) model of the Auerbach-Kotlikoff type for Austria. The FISK OLG model has been tailored for quantifying medium and long-run effects of demographic change and structural reforms. Decisions of households and firms are microfounded. The model is dynamic and solved in general equilibrium. Particular emphasis was put on a detailed modeling of government revenues and expenditure.

Model description (version 2.2): Working paper

FISK Fiscal Sustainability Report 2021 (German only)

Codes for solving this class of models (toy versions of the large model): solveCGE

Model summary

The aim of the model is to address fiscal policy questions that are, particularly relevant in the medium and long run. The model is fit to Austria and captures Austria-specific institutional features. As demographic change is an important determinant of future fiscal developments, we put particular emphasis on a detailed representation of the population structure. Persons differ in the following dimensions: age (recorded in single years in the tradition of Auerbach and Kotlikoff, 1987), birth year, highest attained education (primary, secondary, tertiary), and savings type (Ricardian “consumption smoother” or non-savers following Campbell and Mankiw, 1989). A combination of characteristics per dimension is denoted as a cell. There are limitations to how persons move between cells. Obviously, persons cannot change birth year and age by exactly one year each year. Further, we assume that persons cannot change savings type or highest attained education during life. The demographic module further accounts for differences in sex and contains the number of persons and the vital rates (fertility, mortality and net migration) per cell. In the economic part of the model the household sector is populated by representative unisex households per cell. Persons younger than 15 do not make economic decisions and are allocated to the adult population by adjusting household size weights accordingly. The representative households make decisions along the following margins: consumption, participation and retirement and hours supply. Therefore, age- and education-specific participation, income, consumption, etc. profiles by cohort are model outcomes, which when aggregated in cross-section result in the macro aggregates of the household sector. Mortality is stochastic. Besides that agents are gifted with perfect foresight, i.e. future events are expected by agents with certainty. However, the model allows for the introduction of unanticipated shocks.

The model is dynamic and solved in general equilibrium, i.e. prices are the result of interaction of households and firms in product and factor markets. Firms make forward-looking decisions concerning investment, labor demand, and (in case of monopolistic competition) price setting. The production function(s) take(s) private capital, public capital and labor as inputs, while treating labor-augmenting technological change as fundamentally exogenous. The government affects the economy by altering agents’ resource constraints (via taxes and transfers) and therefore decisions and by participating in product markets (via public consumption and public investment). Further, it issues debt that is an imperfect substitute for other assets (domestic and foreign firm assets and foreign public debt) such that there is no arbitrage and assets can earn different returns. Demand for different asset types is based on a portfolio optimization problem of households. Final demand for goods is allocated between domestic and imported goods by using the Armington (1969) assumption.

Particular emphasis was put on capturing government revenues and expenditures. Most of the taxes are proportional, with the exception of the progressive income tax, which is based on non-linear tax functions. Demography-related expenditure is mostly modeled by using age-skill-specific unit cost profiles. Special care was taken to model the pension systems. Pensions are based on persons income histories and are subject to different pension system regimes (old systems for private sector employees and civil servants and the new harmonized pension account system). By default, the model is fit to the historical development with an initial steady state that goes back many generations, such that (in contrast to many comparable models) the current base year is not treated as a steady state and can capture non-stationarities as observed in the data. Examples are the non-stationary relationships of the current population structure and current vital rates, or that of the current primary balance and the current level of debt. Furthermore, this way future trends, such as aging, are already included in agents’ expectations. In addition, this allows us to consider historical reforms, such as pension reforms with gradual, yet long-lasting consequences.

Selected results

Rmod

under construction