The next generation: Building a bridge between microsimulation, life-cycle, and macroeconomic models

Monday, 9 May 2005

Melbourne Institute
Seminar Room, 6th floor (entrance via 7th floor reception)
Alan Gilbert Building
161 Barry Street (corner of Grattan St, Carlton)

Local Organiser: Hielke Buddelmeyer

Aim of the workshop
Presentation Abstracts


Monday 9 May 2005

09:00 - 09:15 Welcome with Coffee & Tea
09:15 - 10:15 Presentation by MITTS Team (Melbourne Institute)
      "Challenges and opportunities in MITTS for building a bridge with lifecycle and macro models"
10:15 - 10:45 Discussion
10:45 - 11:00 Coffee & Tea Break
11:00 - 12:00 Presentation by Philip Adams from COPS (Monash University)
      "Linking models: Experience from the IMPACT Project and CoPS"
12:00 - 12:30 Discussion
12:30 - 13:00 Presentation by Nicolas Herault (University of Bordeaux)
      "Building a Microsimulation Model and linking it to a CGE Model: The South African Microsimulation Model"
13:00 - 13:15 Discussion
13:15 - 14:00 Lunch Break (sandwich lunch provided)
14:00 - 15:00 Presentation by Phil Gallagher from RIM (Australian Treasury)
      "Treasury's Retirement and Household Income Models - Current Practice, Issues and Future Directions "
15:00 - 15:30 Discussion
15:30 - 15:45 Coffee & Tea Break
15:45 - 16:45 Presentation by Gavin Wood (RMIT)
      "Microsimulation modelling of tenure choice and grants to promote homeownership"
16:45 - 17:15 Discussion
17:15 - 17:30 Closing


Aim of the workshop

The aim of the workshop is to bring together a technical audience of micro and macro economists from academia and government, to share existing expertise and help accelerate the development of the next generation of Australian models needed to address tomorrow's questions.

The next generation of models can be seen as developing along two parallel avenues that may at some point intersect. The first avenue would incorporate both behavioural and life-cycle elements, but otherwise remain a classic' partial equilibrium microsimulation model. This type of life-cycle model incorporates transitions regarding, for example, partnering, fertility, labour force status and earnings. In addition, taxation and social security outcomes are incorporated and behavioural responses are allowed. The second avenue would combine current microsimulation models with recently developed models in the class of dynamic, stochastic general equilibrium (DSGE) macroeconomic models. In DSGE models, households have differing employment histories, levels of wealth, education, access to credit, or in general exhibit realistic degrees of heterogeneity among consumers. These heterogeneous agent DSGE models allow for more sources of uncertainty than existing microsimulation models (but are at a more aggregate level) and could be used to incorporate business cycle shocks, monetary policy and productivity shocks into current microsimulation-based analyses.

Although currently still operating in relative isolation, both micro and macro models could exchange important information with each other. The microsimulation models can provide guidance on the best ways in which existing DSGE models can be developed to examine policy issues. In turn, the general equilibrium nature of heterogeneous agent DSGE models provides useful guidance on how best to incorporate general equilibrium features into microsimulation models.

Presentation Abstracts

Challenges and opportunities in MITTS for building a bridge with lifecycle and macro models


Microsimulation models are built to replicate closely the considerable degree of heterogeneity observed in the population. The focus is on MITTS, a behavioural microsimulation model, which takes individuals' labour supply responses into account when analysing tax and transfer reforms. Given the relatively recent development of behavioural microsimulation models, there are several opportunities for further extensions. For example, it would be valuable to allow for the demand side of labour, indicating whether new labour force participants are likely to find work; or to allow for life-cycle dynamics, which are important to deal with population-ageing issues or with female labour force participation. This presentation outlines the technical challenges and opportunities to building a bridge between microsimulation, life-cycle, and macroeconomic models.

Presenter: MITTS team


Linking models: Experience from the IMPACT Project and CoPS


In this presentation we review the history of linking models at the IMPACT Project and at the Centre of Policy Studies (CoPS). Examples include efforts to link CGE models with demographic systems and with Macro-econometric and microsimulation models. Other examples include top-down disaggregations of the CGE core to produce detailed results for occupations, incomes and regions. Some of these efforts have been successful, others have not. Reasons for failure are discussed and ideas for the future are outlined.

Presenter: Philip Adams


Building a Microsimulation Model and linking it to a CGE Model: The South African Microsimulation Model


This document has to be seen as a starting point in the project of building a microsimulation model and linking it to an existing CGE model. The emphasis is on the labour market. The equations and choices made in respect of the selection model, regression model and labour supply model are briefly discussed. Then more details are provided on the "top-down" approach used to link the microsimulation model and the CGE model. Some constraints on the microsimulation model are required in order to achieve a certain degree of consistency between the two models.

Presenter: Nicolas Herault


Microsimulation modelling of tenure choice and grants to promote homeownership


This paper develops a microsimulation model of the Australian housing market that has tenure choice as its principal focus. The paper has two aims. Firstly, to shed light on the role played by relative prices, wealth and borrowing constraints in shaping housing tenure choices. Secondly we explore the model's capabilities as an aid to policy making by reporting the findings from an impact analysis of grant programs designed to ease the transition of first homebuyers into owner occupation. We find a large demand for home ownership that is not met because of borrowing constraints. The need to meet financial institutions' down payment requirements is particularly important. Government grants made available to first homebuyers will ease down payment requirements, but the formal incidence of such a subsidy is found to be inequitable among potential first homebuyers, and its impact is largely to bring forward purchase decisions.

Presenter: Gavin Wood (RMIT)