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

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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.