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Introduction for MAKRO

MAKRO is an economic model built with the intention of supporting the government in implementing healthy policy through macroeconomic forecasts and policy impact analysis for the Danish economy.

Objective

The MAKRO model’s purpose is to project and forecast the Danish economy in the medium to long term as well as to evaluate effects of economic policy. In doing so, it also integrates short-term government economic forecasts. The structural level of the economy – including the structural government balance - is included as an integral part of the model as well as short-term analyses of the economy, fiscal sustainability requirements , and structural economic impact of policy proposals.

Description

MAKRO provides forecasts of values for economic indicators such as GDP, foreign trade, consumption, public spending, tax revenue all of which for both current values as well as future values. The model can also allow for assessment of specific government policy, assessing the government intervention both at the structural level: “What happens in the long-run if there is an increase in the enrolment and graduation rates of those completing a higher education?”, or at the cyclical level: “How will the delayed public investment affect employment in the coming years?”.

The main focus of MARKO is public finances and as such, having a model that can evaluate the public sector in detail, including the structural balances and the fiscal sustainability indicator is crucial. To give a good description of the development of the government finances , in both the short and long-run, MARKO contains a detailed modelling of the labour market, households, and firms in addition to the public sector. This includes a detailed description of the structural factors that are relevant to economic development such as the aging population, withdrawal from the labour market, changes to education related demographics, oil and gas in the North Sea, political reforms, and other factors that create frictions in various areas of the economy that could, for example, create unemployment.

Significant drivers of long-run economic development such as demographics, technological advancements, higher education completion rates, labour force participation rates and pension savings are a few considerations of MAKRO. The model draws forecasted values for these mentioned drivers from various models such as the Finance Ministry’s labour market forecast (Befolkningsregnskabet) and DREAM’s pension model. In the short-term (2-3 years), the MAKRO forecasts will be based on the government’s cyclical level forecasts.

Structural levels such as the age distribution and education rates contribute to the structural employment rates, whereas the cyclical levels influence the actual employment rate. In the short-run, higher demand will result in higher employment and wages adjust slowly and accordingly. This provides an explicit calculation of not only the structural level of balances, but also the actual balance under cyclical influences. The fiscal sustainability indicator, which is an indicator of whether expected income is sufficient in covering expected expenditures, can also be influenced by cyclical effects. If the government is required to engage in unexpected expenditure, future loan repayments will undoubtedly have a consequence on the future sustainability of the economy. Cyclical effects on the fiscal sustainability indicator are thus explicitly calculated within MAKRO.

Read about the structure of MAKRO

Application

In general, MAKRO is used in two applications. The first application is used to calculate a target for the government’s forecast for the Danish economy. In doing so it creates what we call a baseline scenario which is used to perform impact analysis of economic policy.

The baseline scenario is a set of forecasted values generated by inputting the best possible outcomes for the economic indicators used by the model. In the short-run, the forecast is generated using the government’s business cycle assessment. In the long-run, the forecast builds upon assumptions of unchanged fiscal policy i.e. unchanged tax rates and government expenditure, which follow steady state growth rates as well as changes to demographics. Additionally, the estimated effects of future changes to economic policy are accounted for.

The model, in addition to calculating the aforementioned baseline scenario, can be used to calculate the effects of economic policy. This is done through adjusting the underlying components of the forecast to account for changes to economic policy. The effect of the policy is then assessed against the baseline forecast without the policy change.

Background

MAKRO has been under development since 2017. A beta-version of the model is expected to be published in 2021, whereupon it will be implemented and used by the Danish Ministry of Finance. The model has been commissioned to strengthen the Ministry’s empirical modelling capabilities. The goal of the model is to develop a macroeconomic model that can be used to forecast and evaluate macroeconomic consequences of policy and shocks that apply to the economy on a cyclical and structural level. It is essential that the structural development of the economy - including the structural balance - is an integral part of the model.