Stochastic Simulation Model for Forecasting Index‐Linked Public Expenditure

Abstract This paper introduces a system dynamics (SD) model for analyzing public sector cost growth, where costs are tied to indices. The SD model isolates the effects of automatic indexation, providing probabilistic projections of expenditure growth. It enables testing of alternative indexation strategies and cost‐reduction measures. Findings show how automatic indexation can accelerate spending during inflation spikes, emphasizing the need for risk‐ and uncertainty‐aware fiscal analysis. Using the Finnish welfare system as an illustrative case, the model output is examined in terms of its value for economic policy planning, providing insights for academics and policymakers.