invests in Türkiye, which corresponds to F/X flows for investment purposes (e.g., FDI, short term capital movements etc.).

The model follows a savings-driven closure where aggregate investment is flexible and equals the available volume of saving. Foreign saving is exogenous and fixed as a share of GDP, while government and household savings are endogenous. In effect, the rate of return on capital adjusts to equalize investment to the saving. Hence, the model has the crowding out effect where government investment displaces private investment.

The model dynamics follows the neo-classical growth framework (Solow-Swan growth model) implying that the long-run growth rate of the economy is determined by three main factors: capital accumulation, labor supply growth, and increases in productivity. The stock of capital is endogenous, while the latter two are exogenously determined. The capital stock in each period is the sum of depreciated capital from the previous period and new investments. For each type of labor, the maximum stock of labor available in each period grows exogenously based on population projections by age cohort and cohort-specific participation rates. The technical progress specific to sector and production factors are calibrated to replicate the GDP growth in the baseline and equals that calibrated level in simulations.

On the data side, the model is calibrated to replicate the 2018 Social Accounting Matrix (SAM) for Türkiye, which consists of the 2018 macro-aggregates, the 2012 Input-Output (I-O) table, and household surveys. It includes 38 sectors and products, 6 factors of production, and 10 types of households by income deciles. The SAM also distinguishes between public and private investment demand and includes seven electricity activities that produce a homogeneous electricity product: coal, gas, nuclear, hydropower, wind, solar and other. The single electricity sector in the original I-O table is divided based on the GTAP electricity database with ad-hoc adjustments for the Turkish electricity balance tables. Nuclear power is introduced with a small share in electricity supply based on the average cost structure of nuclear power activities in the GTAP power database.

# 2 MFMOD additional feature

The World Bank’s macrostructural model, MFMod is used in quantifying the economy-wide impacts of the energy efficient infrastructure investment. The customized standalone model for Türkiye extends the investment channels along the several dimensions. (1) Capital stock is differentiated by public and private contributions and (2) capital stock is differentiated between infrastructure and non-infrastructure capital,<sup>17</sup> and (3) the time horizon is extended to 2040.

In the model, investment decisions are based on the difference between returns and the cost of capital. Specifically, the dynamic investment equation is a function of past investment decisions (to reflect the “sticky” nature of asset decisions) and the marginal Tobin’s Q ratio, which reflects the return vs. the cost of capital. In the long-run, the investment to capital ratio is a function of long-run economic growth plus the rate of capital depreciation. The private sector infrastructure equation is written as:

> 17 In (Hallegatte, Jooste, & McIsaac, 2022), they use a modified version of the model to explore the vulnerability to floods and earthquakes. <u><mark>http://hdl.handle.net/10986/37060</mark></u>

27