Journal

Volume 70, #2

 “Economic Sciences: theory and practice” is scientific, refereed, biannual journal. The Journal of “Economic Sciences: theory and practice” has been founded by Azerbaijan State University of Economics in 1994.              
The Journal has been received to registration in the centre of international ISSN (International Standard Series Number, ISSN-2220-8739). Also, it has been included by the Supreme attestation Commission under the President of Azerbaijan Republic to the list of scientific publications on economic sciences.


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An integrated macro-fiscal forecasting model and its application for the Bangladesh economy

Dr. Hashim Al-Ali Senior Macroeconomic and Fiscal Management Advisor Ottawa, Canada


Abstract. The main objective of this modelling efforts is to formulate and articulate, a macroeconomic and fiscal model for forecasting and decision purposes for Bangladesh. Given the actual modeling needs, the limitation and coverage of the available statistical data and limited modelling related capacity within the ministry of finance (MOF), an attempt has been made here to structure, formulate and numerically articulate a macro-fiscal forecasting model that is characterized as; realistic, simple, though comprehensive but easy to understand and comprehend, integrated for all the segments of the national economy (real economy, fiscal, financial and external sector) included in the model and brought together, in an economically viable causal-chain sequential relationship, with impact oriented and feed-back solutions processes. The constructed model however, has been structured in such a way so that it can be absorbed by the prevailed technical capabilities and capacities of the existing MOF/macroeconomic wing (MEW) staff, can be calibrated, empirically articulated, and implemented as well as run with different economic and development scenario alternatives, for future projections, and hence, it can be used as an effective tool for forecasting and decision as well as policy making process.
Accordingly, the integrated macro-fiscal forecasting model has been constructed and established based on the following principles and assumptions:
  - The macro-fiscal forecasting model constructed and implemented during this assignment, for Bangladesh economy, is a comprehensive integrated economic and fiscal model, in which all the segments of the national economy of Bangladesh, i.e. real economy, fiscal sector, financial (monetary) sector, external sector and social sector, have been structured and modeled, in such a way that economic decomposable relationships and interactions of the various segments with each other have been captured and worked out, and hence, identifying and measuring the behavioral impacts on each other development and progress, in expansion and/or contraction. Thus, such an interactions and feed-backs between different segments of the economy, have been considered as the main backbone of this applied model.
- Methodologically, the model is a forecasting, strategic simulation and decision/policy making model, based on specifying and structuring a variety of simultaneous equations and systems relationships. Moreover, and in order to empirically solve these structured system of equations and economic functional relationships, the adopted modelling techniques is based on and applied a hybrid approach of econometric methods, algebraic settings, and mathematical techniques and algorithms. These all based on the general equilibrium concepts and principles.
- Essentially, the model is a macro-fiscal forecasting and simulation model, but actually, in its schematic framework has been developed and gone further than this. Therefore, it has economically adopted and specifically built-in an “equilibrium mechanism” on different aspects and dimensions, in a dynamic and non-linear setting.
- The model, in order to be complete and more beneficial to the development of Bangladesh economy and its future outlook, has been deliberated to cover further economic dimensions other than the aggregated macro-fiscal and the five segments of the national economy. These additional dimensions are the sectoral/sub-sectoral and commodities dimension. Whereas, all these sectoral and commodity dimensions have been included and considered, as an integral part of the main modules of the model. This has, nonetheless, covered all economic/fiscal, outputs, products, inputs, imports and resources requirements functional relationships.
- The model has been solved simultaneously, i.e. that all the system of equations are integrated and solved simultaneously, with all impacts, feedbacks and interactions are calibrated/simulated, in one go. Despite these vital economic and mathematical facts, the model also be solved in an individual manner, with various segments of the model handled and ran separately. Given the built-in flexibility, the solution outcomes of a given segment would be plugged and fed-in an alternative segment’s model setting “exogenously”, when deemed necessary. Thus, this of course depends on the immediate needs for policy decision, data availability, computer programming capabilities, and functional/analytical objectives and purposes.
- One of the most important features of the model is that, in its formulation and when it has empirically implemented and solved, it has achieved and preserved the aimed at equilibrium in, amongst others, the overall economy supply and demand, consumption and production, investment and saving, revenues and expenditure, to mention but a few.
- The model is characterized with the built-in mechanism and fact that all its parts and segments are interconnected, and follow sound logical economic sequences. This is, in addition to the fact that the optimum feed-back mechanism that has been analytically and mathematically established, between different segments and variables of the constructed macro-fiscal forecasting model, are identified and quantified within and by the model’s solution procedures. The macro-fiscal forecasting model formulation, settings and solution have ensured inclusion, in a realistic manner, all economically viable relationships, activities and aspects that practically existing and normally dominating the growth path of developing economies such as Bangladesh economy. Having said that, the related and applicable activities, in the context of Bangladesh, have been determined during the implementation stages, subject to the availability and the conditions of the relevant information.
- Furthermore, it is imperative to state that the macro-fiscal forecasting model structured, developed and articulated for the Bangladesh economy, is based on the following characteristics: i) be an effective forecasting tool, ii) creating and develop a baseline (‘As Is’) forecast (solution) for the Bangladesh economy, iii) produce alternative scenarios (based on policy, risk and sensitivity analysis) for the economy, v) demining priority and leading growth sectors for the optimal allocation of investment and other government expenditures, based on factors including economic growth, job creation, and social benefits and outcomes, and vi) provide an analytical framework for monitoring of the impact of the annual budget, medium-term budget framework and any adopted development and public investment programme.
- The model and its different segments, sectors/sub-models, and equation systems, have been numerically articulated and solved, for the Bangladesh economy, using a hybrid of different types and sources of statistical data. In order to articulate various incorporated relationships and functions within the model’s framework. Accordingly, the macro-fiscal model is designed to use and utilize all available and valid data, in the format of; time series, cross-section, inter-industrial/inter-sectoral input-output data, simulated data, borrowed data and/or experts assumptions, views and judgment, as well as handling different policy scenarios alternatives.
 - Most importantly, the macro-fiscal model, in its entirety and for all of its segments/sectors, have been used as a viable analytical and knowledge topic for a thorough practical training programmes. Such a programmes have been successfully delivered to selective MOF/FD/MEW staff. Whereby, such modelling techniques, procedures and solution results, together with how to interpret the outcomes and how be used in by the related divisions for preparation of MTMF and MTBF, have been achieved. This is besides, that MEW staff have been trained and guided on the required statistical data to apply and articulate the model’s modules and contents. Hence, data needed to run the model, and on different variables and dimensions, have properly gathered, cleaned, tabulated and normalized in values, prices, quantities, indexations, etc. Thereafter, all the stated and demonstrated model’s mathematical/econometric and economic equations and functional relationships, have been calibrated and numerically articulated, with the full participation of the MOF/MEW staff. Thus, in doing so the staff would be able, from now onward, to assist in the process of carrying out the sought after forecasting and projections of various parts and segments of the model and the economy, as identified therein. These empirical solutions would eventually serve in an effectively manner, and facilitate the MOF work, amongst others, on preparation of medium term macroeconomic framework (MTMF), medium term budget framework (MTBF), public finance management (PFM), investment programmes (PIP), and on all other related macro and sectoral issues and strategies/policies affecting socio-economic development, macroeconomic stability and fiscal sustainability of Bangladesh economy, at large, and for the future years to come.
- Finally, this modelling technical report has been concluded by specifying the actual statistical data used in solving the integrated model’s equations, the estimated parameters and coefficients, and the forecasting results on different variables and dimensions until 2017. This model, however, has been solved in two versions, namely: version one; is solving segmental four modules modelling and forecasting, covering the four segments of the economy, while version two; is solving an integrated policy model that pooling together all segments in one integrated framework, that can handle various policy scenario alternatives. This will assist and expedite developing and enhancing the obtaining and updating the statistical data for the modelling uses. Moreover, and by so doing, national indigenous capacity, in macroeconomic and fiscal management models structuring, formulating, forecasting and uses, within the Ministry of Finance and in Bangladesh at large, would be enhanced and furthered.

Key words: macro-fiscal forecasting model, constant elasticity of substitution, foreign direct investment, public finance management, public investment programme.

JEL Classification Codes:E17; E27; F47.