Macro-fiscal modelling and forecasting tool demo

Introduction:

The Macro-Fiscal Modelling and Forecasting tool demo enables decision-makers to assess macroeconomic policy scenarios using the cutting-edge macro-econometric model without needing to solve complex system equations, which remains at the backend of the interface. The MFMF provides also easy access to resources on the macroeconomic policy simulations and forecasting for demo, including the model manual and policy papers. The interface of the model can be accessed after clicking on Simulate the model tab.

The Model

The Extended Single-Country WEFM is a structural macro-econometric model comprising approximately 80 equations, including around 20 key behavioral relationships. In the long run, the model follows a neo-classical supply-side framework, while in the short term, it is primarily driven by Keynesian demand-side dynamics. It incorporates backward-looking expectations (lagged dependent variables) and policy rules—both monetary and fiscal—designed to simulate real-world policy development. All sectors are interconnected through an accounting framework.

The model’s core econometric structure is based on a cointegration error correction model, which is used to estimate behavioral relationships

The model includes four types of agents:

Households: They consume goods and supply labor.
Firms: They produce goods, employ labor (demand from households), and drive investment demand.
The Government: It collects taxes, spends on public consumption, borrows (contributing to public debt accumulation), and makes interest payments.
International Markets: Domestic firms engage in export and import activities, where external demand is treated as exogenous.

A key feature of this model is the expanded government block, offering a more detailed analysis of government revenue, expenditure, and debt compared to the original WEFM that is especially useful for analyzing then economic consequences of additional social expenditures as outlined within the “Quality of life” pillar of the demo’s Economic Modernisation Vision. Government revenue is broken down into direct taxes, indirect taxes, customs duties, and other revenues, while expenditure is categorized into social spending (disaggregated into seven areas: education, health, housing, social protection and subsidies, labor market and jobs, arts, culture and sports, and environmental protection), other expenditures, and interest payments on debt.

Social expenditures are exogenized for scenario analysis, allowing the user to input these directly through the interface. Net lending, defined as the difference between government revenue and expenditure, and government debt, split into domestic and foreign components, are also included. Interest payments on debt are calculated separately for domestic and foreign obligations, enabling more precise fiscal policy analysis and scenario forecasting.

Simulate the model

Target values for variables of interest

Debt stabilization assumptions	Current value	Target year baseline	Set target year value
Target year

Debt (% of GDP)

Structure of borrowing			Set new borrowing structure
Domestic currency debt (% of borrowing)
Foreign currency debt (% of borrowing)

Revenue mobilization assumptions	Current value	Target year baseline	Set additional revenue
Income and corporate tax revenues (% of GDP)
Revenue from goods and services and other taxes (% of GDP)

Sum of the government tax revenues (% of GDP)

Estimated additional fiscal space over the 2025-{year entered by user} period is equal to: {value1}, which is {value2} of estimated baseline public expenditure over that period. That is equivalent to {XX} of total GDP over that period.

Efficiency and productivity assumptions			Set Additional TFP boost
Additional TFP boost (% of baseline level)

Distribution of additional spending

Social spending (% of GDP)	Current value	Target year baseline	Set additional spending
Education and skills
Health and well-being
Housing and amenities
Social protection and subsidies
Labour market and jobs
Arts, culture and sports
Environmental protection

Total social spending
Other expenditure (excl. interest payments)
Sum of additional expenditure (% of GDP)

Distribution of non-interest expenditures	Current value	Target year baseline	Set additional spending distribution
Government consumption (% of total non-interest expenditure)
Government investment (% of total non-interest expenditure)

The monetary policy follows the Taylor rule

Disclaimer:

The values presented by the MFMF interface demo are exemplary only and do not apply to any particular country.

History and origins of the model

The model demo used in the MFMF tool is extended, country-specific version of the World Economic Forecasting Model. The World Economic Forecasting Model (WEFM). WEFM is a multi-country model, developed from the Project LINK initiative launched by Nobel Laureate Lawrence Klein in the 1960s, and now managed by the UN Department of Economic and Social Affairs (UN DESA). WEFM covers 176 countries and focuses on GDP forecasts, using a global trade matrix to link national models and ensure consistency in international trade data. It combines short-term data-driven dynamics with long-term macroeconomic theory, following an error-correction framework. Each country model includes around 60 equations, capturing key economic behaviors influenced by global factors such as demand, oil prices, exchange rates, and domestic policies. While emphasizing long-term macroeconomic trends, the model assumes GDP will converge toward potential levels, inflation will stabilize, and other key indicators like productivity and government debt will normalize over time.

Fundamentals

The Extended Single-Country WEFM demo model inherits key features from its large-scale global predecessor. As a result:

It is a simplified structural macro-econometric model.
It consists of approximately 80 equations, including around 20 key behavioral relationships.
In the long term, it follows a neo-classical supply-side framework.
In the short term, it is primarily driven by Keynesian demand-side dynamics.

Additionally, the model incorporates backward-looking expectations (lagged dependent variables) and policy rules (both monetary and fiscal), simulating real-world policy development. All sectors are interconnected through the accounting system.

The primary econometric framework is based on the cointegration error correction model, which is used to estimate behavioral relationships. Estimation follows a two-step process, beginning with Discounted Least Squares to adjust for bias. In some instances, constraints are applied to ensure coefficients have appropriate signs and reasonable bounds. It was adjusted to conditions specific to demo through extended government and public debt sector. Consequently, it allows for analyzing demo-specific policy measures such as the social expenditures within the “Quality of life” pillar of the demo Economic Modernization vision.

Agents in the model

In the model demo, there are four types of agents. Households consume and demand goods. In return they provide labour supply. Firms produce - supply goods to the market. These goods are demanded by households, firms and government. They also employ people (demand labour provided by households) and invest (are the source of investment demand). The government in the model collect taxes. It spends on the government consumption. Furthermore, it borrows leading to the buildup of the public debt and pays interests. The fourth segment is the external sector. There is exchange of goods on the international markets. Domestic firms export (the external demand is exogenous) and import from the outside. These agents are schematically presented on the figure 1.

Figure 1. Model scheme

Government sector

The government block of the model has been expanded in comparison to the original WEFM to provide a more detailed analysis of government revenue, expenditure, and debt that is especially relevant to analyze demo-specific policies. In particular, the detailed representation of social expenditures allows for the analysis of

Government revenue is disaggregated into four components:

Income, Profits, and Capital Gains Taxes (GGRTIX)
Goods and Services Taxes (GGRTOX)
International Trade Taxes (GGRTTX)
Other Revenue (GGRO)

Revenue is calculated by multiplying tax rates by their relevant economic bases (e.g., income, trade, etc.), while other revenue follows nominal GDP growth. The total revenue (GGR) is the sum of all revenue sources.

Government expenditure includes:

Social Expenditures: Education (GGXED), Health (GGXHE), Housing (GGXHO), Social protection and subsidies (GGXSP), Labour market and jobs (GGXLM), Arts, culture and sports (GGXAR) and environmental protection (GGXEN).
Other Expenditures (GGXO)
Interest Payments on Debt (GGEI)

Social expenditures grow based on a mix of trend output growth and GDP adjusted for terms of trade. Interest payments are broken into domestic and foreign components, with different rules for growth and are exogenized for scenario analysis (entered by the user in the interface). Such detailed representation of the government expenditures allow for very detailed modelling of the economic consequences of the additional government spendings as outlined in the demo’s Economic Modernization Vision.
Net lending is the difference between government revenue and expenditure.

Government debt is split into:

Domestic Debt
Foreign Debt

Total government debt is the sum of domestic and foreign debt (converted into domestic currency using the exchange rate). Each period, the deficit is financed by a mix of domestic and foreign borrowing.

Interest payments on debt are calculated for domestic debt (GGEID) and foreign debt (GGEIX$). The total interest payment (GGEI) is the sum of these components, with domestic interest rates (GINT) applied to domestic debt and foreign rates (GINTX) to foreign debt. Such split allows for detailed representation of the government debt of demo with the roughly balanced borrowing in local currency and US dollars.

This disaggregation allows for better analysis of fiscal policy and its impacts, with various variables available for forecasting or scenario planning for the purpose of the MFMF tool demo.

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