Read the full Working PaperIn this paper we describe a new type of computable general equilibrium (CGE) model that integrates detail of the economy’s financial sector with a traditional real-side CGE model. We use the model to explore the macroeconomic effects of the superannuation sector in Australia by simulating a one percentage point increase in the ratio of superannuation contributions to the national wage bill. This simulation has relevance to current policy debate on the merits of further increases in the compulsory contribution rate. Our results indicate that a rise in the superannuation contribution rate increases long-run real GDP, largely via an increase in the savings rate. At the same time, the structure of the superannuation sector’s activities, relative to other savings vehicles, boosts short-run employment and housing investment.
For over half a century, CGE models of increasing complexity and detail have been used to elucidate a diverse range of economic policy questions. Use of these models to analyse financial markets has been less common.
Australia’s superannuation sector has become both a major institution in allocating the nation’s financial capital across asset classes, regions, and sectors, and a central intermediary in channelling the nation’s savings into domestic capital formation and foreign asset accumulation. We model this important institution within an economy-wide setting by embedding explicit modelling of the sector within a model of the financial sector, and integrating the model of the financial sector with a traditional dynamic multi-sectoral CGE model of the real side of the economy.
Our model includes explicit treatment of: (i) financial intermediaries and the agents with which they transact; (ii) financial instruments describing assets and liabilities; (iii) the financial flows related to these instruments; (iv) rates of return on individual assets and liabilities; (v) links between the real and monetary sides of the economy; and (vi) traditional detailed modelling of the non-financial actions of economic agents.
This paper presents a description of the theoretical detail of the financial CGE model. We then explore the interactions between the superannuation sector and the economy by simulating a one percentage point increase in the proportion of the national wage bill allocated to superannuation.
The effects are decomposed into two parts:
- the intermediation effect: the effects of a rise in the proportion of national savings that is intermediated by the superannuation sector rather than allocated across financial instruments by households directly
- the savings effect: effects flowing from changes in the national savings rate caused by changes in the savings rates of those households which would have saved less if not for the influence of compulsory superannuation.
We explain these results as a sequence of cross-referenced arguments.
- Private consumption falls relative to baseline over the simulation period, largely due to the savings effect.
- The real gross national expenditure (GNE) deviation is below the real GDP deviation.
- The balance of trade (BoT) moves towards surplus, largely due to the savings effect.
- The current account deficit (CAD) falls, largely due to the savings effect.
- The savings effect creates pressure for nominal appreciation.
- The intermediation effect creates pressure for nominal depreciation.
- The savings effect puts downward pressure on the GDP deflator.
- The intermediation effect puts upward pressure on the GDP deflator.
- The net impact on the GDP deflator is towards negative deviation. With little change in the nominal exchange rate, this implies a net negative deviation in the real exchange rate.
- In the short-run, the savings effect imparts upward pressure on the real producer wage, while the intermediation effect imparts downward pressure.
- In the short-run, the savings effect depresses employment, while the intermediation effect raises employment.
- Real GDP falls relative to baseline in the short-run, but rises relative to baseline in the long-run.
- The weighted average cost of capital falls relative to baseline.
- Aggregate investment rises relative to baseline causing the physical capital stock to rise relative to baseline.
- Housing investment falls in the short-run, but rises together with general investment in the long-run.
Our FCGE model shows that mandated contributions to superannuation raise real GDP in the long-run. This is largely due to the savings effect: mandated contributions raise total Australian savings thereby raising the supply of investable funds to Australian industries and increasing the nation’s capital stock.
Application of a traditional real-side CGE model would have produced a similar finding. But such a model would miss important long-run and short-run effects captured by the financial CGE (FCGE) model. For example, the FCGE model recognises that the superannuation sector has a higher propensity to invest offshore than the household sector. Thus, the FCGE model shows that diversion of funds into superannuation offsets some of the long-run gain to the Australian capital stock from the increase in total savings.
A short-run effect captured by the FCGE model, but missed by a real-side model, is the depreciation of the nominal exchange rate induced as the economy increases its acquisition of foreign financial assets. With sticky nominal wages, depreciation has a useful employment stimulating effect.
This Working Paper was produced by the CSIRO-Monash Superannuation Research Cluster a collaboration between the CSIRO and Monash University, the University of Western Australia, Griffith University and the University of Warwick in the United Kingdom. In addition, the Cluster engages on an ongoing basis with a range of industry supporters, government agencies and industry peak bodies who assist in providing guidance and feedback to researchers, providing data, and in disseminating outcomes. The purpose of the Super Research Cluster is to examine issues pertaining to the future of Australia’s superannuation and retirement systems.