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FIDELIO 2: Overview and theoretical foundations of the second version of the Fully Interregional Dynamic Econometric Long-term Input-Output model for the EU-27

This report serves as an update of "FIDELIO 1: Fully Interregional Dynamic Econometric Long-term Input-Output model for the EU27" by Kratena et al. (2013), i.e. the manual of the first version of the FIDELIO model. FIDELIO fits into the generation of macroeconomic multi-sectoral input-output (IO) models whose earliest contributions include the Cambridge MDM (Barker, 1976) and the INFORUM (Almon et al., 1974) models for the UK and the US, respectively. Such econometric IO models have grown over time in terms of complexity and scope and are used for macroeconomic modelling purposes alongside other types of general equilibrium models (including DSGE ones). This report explores the theoretical foundations of the latest version of the model, FIDELIO 2 (which has being developed between 2014 and 2016), and contains a description of its main features. With respect to its initial version, the model has been extended in a number of ways. For instance, and without entering into detail at this stage, seven non-EU countries are now included in the model (Brazil, China, India, Japan, Russia, Turkey and the USA) in addition to the 27 EU countries already included in the first version; both trade and household final demand are now modelled in a considerably more complex way than before; there is an environmental block dealing with greenhouse gas (GHG) emissions; and the base year is 2007 rather than 2005. Thus, it was deemed necessary to present all the new model characteristics in an organic way via the present technical report. The remainder of this report is organised as follows: Section 1 provides a concise macro-overview of FIDELIO 2 which relies very much on the first section of the FIDELIO 1 manual by Kratena et al. (2013). Section 2 presents the economic theories underlying the core blocks of FIDELIO 2. This report serves two main purposes. First, it is an adequate resource for the readers who are interested in the model's main features. Second, it facilitates the process of understanding all the details of FIDELIO 2 for those who want to learn the logic and the theory behind its construction. Such readers are expected to grasp the general structure of the model by reading Section 1, helped by the overview of the model's main economic flows contained in Figure 1. Then, Section 2 goes through the theoretical foundations of the various model blocks.