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

Yvan Guillemette

No 1581, OECD Economics Department Working Papers from OECD Publishing

Abstract: 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.

Keywords: interest rates; long-term scenarios; public health expenditure; public pension expenditure (search for similar items in EconPapers)
JEL-codes: E17 E43 H51 H55 (search for similar items in EconPapers)
Date: 2019-12-04
New Economics Papers: this item is included in nep-age, nep-eec and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:oec:ecoaaa:1581-en

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