A dynamic multiregional overlapping generations computable general equilibrium model for the study of population ageing in the UK

Population ageing is an important challenge facing most countries in the world. The scale of the demographic change, which started in the 20th century and will continue throughout the 21st century, is dramatic. Over the past 50 years the proportion of the UK population aged 65 and above has increased from 12 to 17 per cent, and by 2060 it will reach 26 per cent . The main features of demographic change are its slow pace, long duration and inertia. This makes the process fairly easy to project, but almost impossible to reverse. We need to improve our understanding of what impact this process will have. It will have important implications for public policy in many areas, from education and social security, to fiscal policy and employment regulation. To be able to make informed policy decisions, the government requires access to high quality research on the potential impacts of the projected demographic change. It also needs tools that can be used to evaluate the effect of these population shocks and identify the optimal policy responses.
I propose to build a dynamic multiregional Overlapping Generations Computable General Equilibrium (OLG-CGE) model for the UK and its constituent countries, and apply it to examine the economic effects of population ageing. An OLG-CGE model attempts to provide a comprehensive description of an economy using a system of equations. The feature that differentiates it from other types of models is that it is age-disaggregated, which allows the modelling of age-specific preferences and behaviour, such as labour supply, productivity, consumption structure, saving behaviour, and retirement decisions. The rich demographic structure of an OLG-CGE model allows for the direct evaluation of the aggregate effects of various scenarios as well as their impacts on different generations. The multiregional dimension is important because of the regional variations both in the characteristics of demographic change and in policy. There are important regional differences in population growth rates, the speed of population ageing, and international and internal migration flows. Moreover, there are already differences in the policies of the UK regions concerning education, health, and care for the elderly, and these are likely to diverge more in the future. The implications of policy heterogeneity across regions is likely to generate complex and unanticipated interactions between regional economies.
This project is relevant for all three EERC strategic priorities. It will enhance the understanding of how demographic change affects economic performance and what implications this has for sustainable growth. The model can be used to evaluate and inform policy interventions to counteract negative effects of population ageing. It will also provide an ideal tool to study intergenerational fairness. The project is interdisciplinary - a mix of demography and economics - and requires expertise in economic modelling as well as understanding of demographic processes.
OLG-CGE is a state of the art technique for understanding issues raised by population change and is used in many countries. There are research teams that are working with large-scale OLG-CGE models in the US, Canada, Germany and France. The World Bank, OECD and US government use this type of model for policy simulations. So far the UK does not have capacity in large scale OLG-CGE modelling and does not participate in the development and utilization of this simulation method. The aim of this project is to include the UK in the international network of OLG-CGE modellers, and to build capacity in the UK to tackle the economic policy issues related to population aging.
This project will focus on the issues of demographic change and population ageing. However, the proposed model structure is very versatile. Areas for potential future applications of the model include, but are not limited to, fiscal, education, social security, migration and energy policy.

One of the most important and long lasting impacts of this project will be the integration of the UK into the international network of OLG-CGE modellers. This modelling approach is widely used by academic institutions, research institutes, international organisations and governments for simulating the effects of policy and exogenous shocks on the economy. There are research teams working with large-scale OLG-CGE models in the US, Canada, Germany and France. The World Bank, OECD and US government use this type of model for policy simulations. The UK currently lacks a large-scale multiregional OLG-CGE modelling capacity and is not integrated into the international modelling network. This project will close this gap through the development of a UK model, international collaboration with the modelling team at the University of Ottawa, close informal contacts with the Regional Economics Applications Laboratory (REAL) at the University of Illinois and networking at international conferences, workshops and seminars.
The output of this project will make important contributions to two areas of research. The first is the subject of population ageing and its macro- and meso-economic effects. A wide interdisciplinary (economic, social and demographic) audience will benefit from the findings. The second area is multiregional OLG-CGE modelling. This method would add new capabilities to the existing pool of modelling tools, such as input-output (IO) models, social accounting matrix (SAM) models, static and dynamic computable general equilibrium (CGE) models.
Understanding the effect of population ageing on the economy is crucial for supporting a well-informed public debate on this issue. This project will contribute to existing substantial research in this area by providing new evidence using state of the art methodology. The results of this project will be of great interest to a wide range of stakeholder groups including: national policymakers, for developing policy on labour market regulations and social security provision; policymakers in the devolved regions, who are responsible for education policy and provision of public services; local businesses involved in care and health provision; educational and health authorities; and the wider public, who will be affected by population ageing and the economic policy response. To name just a few government departments and agencies that will be particularly interested in the project findings: the Department for Work and Pensions, HM Treasury, the Office of Budget Responsibility, the NHS, the Scottish Government, the Welsh Assembly Government and the Northern Ireland Executive. I will identify key representatives of stakeholder groups and maintain a dialogue with them throughout the duration of the project. This will ensure that the progress and findings of the project are disseminated effectively to all stakeholder groups. This process has already been initiated through discussion with the Department of Work and Pensions, the Office of Budget Responsibility and the Scottish Government, and senior representatives from all three have agreed to act as reviewers for the project application.
One of the project outputs will be an integrated inter-regional database linking the four UK regions. The database will be made available for other researchers and research organisations on the websites of the National Institute of Economic and Social Research (NIESR) and the Fraser of Allander Institute (FAI).
The project will have a lasting legacy in the form of a flexible modelling framework that can subsequently be very widely applied. The proposed specification of the model is intentionally very versatile to allow simulation over a broad range of topics, running from fiscal policy to energy use, and from carbon emissions to climate change. These topics will not be addressed in this project but once the basic framework is in place it can be easily adapted and extended