Introducing OLG-CGE modelling and the National institute General Equilibrium model for studying population Ageing, NiAGE

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1 Introducing OLG-CGE modelling and the National institute General Equilibrium model for studying population Ageing, NiAGE NIESR, London, February 18, 2013 Katerina Lisenkova Financial support from the Economic and Social Research Council under the grant: A dynamic multiregional OLG-CGE model for the study of population ageing in the UK is gratefully acknowledged.

2 Overview Why study economic effects of population ageing OLG-CGE modelling NiAGE project

3 Overview Why study economic effects of population ageing OLG-CGE modelling NiAGE project

4 Population pyramids. England and Wales 36M males M females M ,000 1,000 1,000 3, ,000 1,000 1,000 3, ,000 1,000 1,000 3, * * 2010-based principal ONS projections

5 Old age dependency ratio* 60% 50% Projection 49% 40% 30% 28% 20% 24% 10% 0% * Population aged 65+ divided by population aged 20-64

6 Economic effects Labour supply Productivity Demand composition Technological progress Public spending Pensions Immigration

7 Overview Why study economic effects of population ageing OLG-CGE modelling NiAGE project

8 CGE model General All the markets, sectors and industries are modelled together with corresponding inter-linkages Equilibrium All markets are in equilibrium in every period Computable Tend to be very complex and thus cannot be solved analytically Calibrated to real world data and rely on solver algorithms that find numerical solutions satisfying all of the model s equations

9 CGE model 2 Mathematical description of an economy using a system of simultaneous equations CGE models are very flexible, and can be used to analyse the macro-economic effects of variety of economic shocks and policies Simulation (what if) not a forecasting tool!

10 Structure of a CGE model Firms Taxes External Import Goods market Goods Public sector Export sector Taxes Households Factors market Borrowing Capital market Savings Migration

11 CGE. Options Firms Production function Number of sectors Government Revenues Expenditures Borrowing External sector Import / Export Foreign investment Immigration

12 Overlapping generations. Household Alternative to a representative agent Several generations Realistic life cycle (birth, work, retirement, death) Age-specific characteristics/behaviour productivity (age-earnings profiles) labour force participation rates demand for public services

13 Overlapping generations structure Age Time A1 A2 A3 A4 A5 T1 G1 T2 G2 G1 T3 G3 G2 G1 T4 G4 G3 G2 G1 T5 G5 G4 G3 G2 G1 T6 G6 G5 T7 G7 G5 T8 G8 G5 T9 G9 G5 T10 G10 G9 G8 G7 G6 T11 G11 G10 T12 G12 G10 T13 G13 G10 T14 G14 G10

14 Why OLG-CGE? Partial equilibrium analysis demonstrates that other things being equal but other things will not stay equal general equilibrium effects change in labour supply wages Macro model with micro foundation Based on principals of optimisation (utility maximisation for household, profit maximisation for firms) Especially important for long-term simulations, as currently observed relationships become less relevant Rich demographic structure and realistic life cycle Important for countries undergoing demographic transition

15 Limitations Complicated Technical skills Time/Data Trade off between complexity and usability Calibration Some parameters are calibrated on base year data Relies on serious assumptions All assumptions are explicit Perfect foresight/ rational decision making Type of utility / productivity function Assignment of exogenous variables

16 Overview Why study economic effects of population ageing OLG-CGE modelling NiAGE project

17 Background Future Research Leaders ESRC grant November 2012 February 2015 Three institutions NIESR University of Ottawa University of Strathclyde/Fraser of Allander Institute

18 Objectives To build a versatile multiregional OLG-CGE model To study the economic impact of population ageing in the UK and its regions To include the UK in the international community of modellers To inform policymakers and the wider public about the effects of population ageing on the economy, and potential policy options

19 Main features of the model Four UK regions and ROW Capital, migration (exogenous) and trade links between regions and ROW One production sector Realistic demography 21 generations (0-4, 100+) time-variable fertility rate time/age-variable mortality and migration rates Endogenous labour force participation (retirement) Three skill levels Age-specific public consumption

20 Age-specific public expenditures National Transfer Accounts (NTA) Developed by Mason and Lee (1994), Lee et al (2010) Attempt to understand the generational economy Social and economic institutions which mediate age-related flows within an economy Quantify the size, direction and nature of age-related economic flows in the economy In a way which is consistent with other measures of economic output (National Accounts) An international project 39 countries David McCarthy at NIESR and James Sefton at Imperial College represent the UK in the NTA project

21 Consumption profiles 25,000 Components of per capita consumption by age, UK (2007) 20,000 p.p. p.a. 15,000 10,000 5, Age Public education Public health Public long-term care Other public Private education Private health Private housing Other private

22 Age distribution of health and education spending per capita 35% 30% Health Education 25% 20% 15% 10% 5% 0%

23 Changes in government expenditures by type. Scotland 160% 140% 120% 100% Age-unrelated Education Health Pensions Total 141% 98% 80% 60% 49% 40% 20% 25% 0% 0-1% %

24 What we plan to do Scotland independence Different demographic situation in Scotland and RUK Possible changes to migration policy in independent Scotland Public consumption (health, education) Growing demand Required productivity improvements (in public services provision) to limit spending Pension reforms Change in parameters of the pension system (pension age, contributions, pension benefits) Regional convergence/divergence Links with ROW Trade Migration

25 Thank you for your attention Follow us on

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