1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Recent improvements to the public finance block of the OECD’s long-term global model

This paper documents recent extensions and revisions made to the model underlying the long-run global macroeconomic scenarios that are published every few years. First, a fiscal block is added for 11 countries that previously lacked one. Second, public pension expenditure projections are made endogenous to the projected ratio of retirees to workers and to a hypothesis on the future evolution of benefit ratios. Cross-country differences in projected public pension expenditure thus reflect many factors, including the speed of population ageing, the evolution of employment rates for older people, especially females, and rules regarding the evolution of statutory retirement ages. Third, revised public health expenditure projections introduce a higher income elasticity in middle-income than high-income countries and makes the excess of health care inflation over GDP inflation (Baumol effect) endogenous to the projected labour productivity growth rate. And fourth, the determination of long-term interest rates is revised to associate the fiscal risk premium to net, as opposed to gross, government debt, and make its size conditional on euro area membership, the quality of public governance and the occurrence of systemic banking crises, while allowing a flight-to-safety effect during such crises to lower bond yields in countries that are providers of global safe assets.

English

Keywords: public health expenditure, interest rates, public pension expenditure, long-term scenarios
JEL: E17: Macroeconomics and Monetary Economics / General Aggregative Models / General Aggregative Models: Forecasting and Simulation: Models and Applications; E43: Macroeconomics and Monetary Economics / Money and Interest Rates / Interest Rates: Determination, Term Structure, and Effects; H51: Public Economics / National Government Expenditures and Related Policies / National Government Expenditures and Health; H55: Public Economics / National Government Expenditures and Related Policies / Social Security and Public Pensions
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