MAKRO is a large, empirically based macroeconomic model of the Danish economy. The purpose of the model is to serve as a tool for medium and long-term projections, short and long-run policy impact assessment, and long-run fiscal policy sustainability measurement. In addition, the model can incorporate short-term economic forecasts into its projections.
The model is developed by the MAKRO model group at DREAM for use by the Danish Ministry of Finance. The model code is made freely available, however, and may be used by anyone.
The model parameters, equations, and data as a whole have been selected such that the short and long-run properties are as empirically and theoretically well-founded as possible. MAKRO incorporates four types of economic agents: households, firms, the government, and foreign agents demanding Danish exports. The model is micro-founded and forward-looking, with the behavior of households and firms supported by a detailed specification of their objective functions, preferences, technology, and budget sets. The government’s behavior follows a set of exogenous rules as is standard, and the demand for exports is determined by a demand function that incorporates aspects of different trade models.
MAKRO is a New-Keynesian model, but differs from so-called DSGE models in a few ways. DSGE models solve for optimal decisions, which are functions of state variables and contain information pertaining to the model’s stochastic nature. These optimal decision functions are defined in a neighborhood of the model’s steady state. MAKRO is instead a computational general equilibrium model that solves for a single path for all its variables. This solution relies on initial and terminal conditions and reflects all policy changes and variations in exogenous factors one wishes to study.
MAKRO also differs from other models of its type due to its size. The household side of the model solves a model of overlapping generations, each with a life cycle of 100 years. The firm side of the model currently solves for nine different sectors of the economy. It is a nonlinear model with a large number of endogenous variables, and as a professional planning and budgeting tool, the model’s variables must correspond precisely to their counterparts in the data. One of the primary purposes of MAKRO is to characterize the government budget balance and how it responds to shocks and policy changes. This requires a considerable disaggregation of the fiscal part of the model as it must be able to evaluate a large number of tax and transfer interventions as well as specific government consumption changes.