Modeling Macroeconomic Dynamic CGE for the Indonesian Economy

Since the seminal work of Auerbach and Kotlikoff (1987), economists who work on taxes and pensions are able to apply the macroeconomic dynamic computable general equilibrium (CGE) as the main tool to predict the long run effect of taxation. The model is also known as the Overlapping Generation (OLG) CGE model. The applicability and the beauty of the overlapping generation model lies in the microeconomic foundation of the model. Even though it is a dynamic macroeconomic model, it contains the behavioral models of economic agents: households, firms, and government. Exports and imports are included in the model to catch the feature of a small open economy country.The main purpose of this model is to construct a model to predict the impact of an integrated pension program for Indonesia on the Indonesian economy. The pension reform offered in this paper is a tax and transfer type. The source of funds is a consumption tax with a cash transfer program for eligible poor pensioners in the short run.