February 2023

IZA DP No. 15937: The Transformation of Public Policy Analysis in Times of Crisis – A Microsimulation-Nowcasting Method Using Big Data

The urgency of the two crises, especially the COVID-19 pandemic, revealed the inadequacy of traditional statistical datasets and models to provide a timely support to the decision-making process in times of volatility. Drawing upon advances in data analytics for public policy and the increasing availability of real-time data, we develop and evaluate a method for real-time policy evaluations of tax and social protection policies. Our method goes beyond the state-of-the-art by implementing an aligned or calibrated microsimulation approach to generate a counterfactual income distribution as a function of more timely external data than the underlying income survey. We evaluate the simulation performance between our approach and the transition matrix approach by undertaking a nowcast for a historical crisis, judging against an actual change and each other. Nowcasting emerges as a useful methodology for examining up-to-date statistics on labour force participation, income distribution, prices, and income inequality. We find significant differences between approaches when the calibration involves structural heterogenous changes. The model replicates the changes in income distribution over one year; over the longer term, the model is able to capture the trend, but the precision of the levels weakens the further we get from the estimation year.