Sveriges Riksbank Occasional Paper Series No. 11 [12]

By Hovick Shahnazarian

Abstract
In this book, we describe the dynamic micro econometric simulation model for incorporated businesses. The purpose is to provide a model that both analyzes the behavior effects induced by changes in the tax code and forecasts the tax revenues. The basic idea is to combine the dynamic behavior of the corporate system with a statistical model that captures the development and the interrelationship between firms’ different decision variables. The dynamic behavior of the corporate system is captured by several difference equations that identify how different variables in the firms’ balance sheets change over time. To be able to do this we use the information in the firms’ three basic financial statements: the balance sheet, the income statement, and the statement of changes in financial conditions. Furthermore, the difference equations system also incorporates special features of corporate taxation. The firms’ decisions regarding the flow variables are modeled in a statistical module. From a dynamic optimization problem we derive the economic relationships between these flow variables and other economic variables. These relationships are then estimated using different robust estimation methods. In the next step, we insert the estimated functions from the statistical module into the difference equations system. This system is finally solved numerically to be able to simulate the future values of the stock variables in the firms’ balance sheets.