Name: Macroeconomic and Fiscal Model (MFMod)-CC (Climate Change)
Type: Macroeconometric
Institution: World Bank
Documentation: Macro-Fiscal Model Technical Description
Geographic coverage: Single country (global)
Description: MFMod-CC is a family of country-level macro-structural models akin to models traditionally used by central banks and Ministries of Finance. It has empirically determined short-run dynamics that allow for frictions and theoryinformed long-run dynamics. Long-run supply is anchored in labor supply, capital stock, and total factor productivity, all endogenized to various extents. Parameters are country-specific and estimated econometrically using historical data. MFMod-CC includes greenhouse gas emissions from five sources, five types of economic damages, transition effects of moving toward a renewable energy economy, co-benefits from mitigation, and an adaptation module.
Questions to be answered/variables considered: Variables include GDP, household consumption, inflation, interest rates, unemployment rates, CO2 emissions, energy mix, sovereign debt, fiscal balances, value-added by sector, and trade (current, financial, and capital accounts). Questions the model can help answer concern the economic, fiscal, and monetary policy implications of the energy transition/climate policy; how climate policies stack up against other policy priorities; the implications of climate change and policies for people, jobs, wages, and consumer prices, how this affects households, and whether household subsidies can mitigate the impact on the poorest without excessively impacting growth; and the interaction of physical and fiscal constraints with climate policy.
Strengths:
- The model is relatively easy to use and, as climate is integrated into a modeling framework that is standard for MoFs and central banks, the learning curve is not as steep.
- It covers country-specific parameter estimates and behavior.
- Transition dynamics to the long-run equilibrium are consistent with economic behavior, structural transformation, and local circumstances. Supply-side constraints are considered via a production function, limiting the benefits of policy responses relative to demand-only models.
- It models explicit household and firm optimizing behavior and thus endogenous adaptation, as well as endogenous reaction of supply and demand to changes in technology, prices, and resources.
- It supports Monte Carlo experiments.
Limitations:
- The model gives less sectoral detail than CGE- or IO-based models, as this is not often available in time-series data. However, IO tables can be used to generate a finer disaggregation (via fixed coefficients or by taking a CES (constant elasticity of substitution)-style production approach).
- Disaggregation of results to the subnational level is not possible if subnational time-series data are lacking, which is the case for most countries. This can be overcome by coupling model results with household surveys or biophysical models.
Assumptions: The model is neoclassical in that it assumes households and firms maximize utility and profits subject to budget and resource constraints.
Use: MFMod is built on and includes standard macroeconomic accounts. Its Excel interface enables nonspecialist analysts to construct baseline forecasts and scenarios, yet the code is transparent and can be modified by staff wishing to delve deeper (in Eviews and Python). The model can be used for standard macroeconomic policy analysis, for climate analysis, and to evaluate the climate impacts of policies without an explicit climate focus. It supports macroeconomic projections and simulations.
Development: Current work includes endogenizing more features of total factor productivity via endogenous changes to land demand and supply, adding Schumpeterian assumptions for growth, and enriching the financial sector.