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Keeping the best of two worlds: Linking CGE and microsimulation models for policy analysis

Author

Listed:
  • Konstantins Benkovskis

    (Latvijas Banka)

  • Ludmila Fadejeva

    (Latvijas Banka)

  • Anna Pluta

    (The Baltic International Centre for Economic Policy Studies)

  • Anna Zasova

    (The Baltic International Centre for Economic Policy Studies)

Abstract

In this paper, we link a CGE model with the tax-benefit microsimulation model EUROMOD for Latvia. The model linkage is done using an iterative top-down bottom-up approach, ensuring the convergence of changes in disposable income, employment and wage in both models. We also incorporate the unreported wage payments in CGE and EUROMOD to account for the substantial labour tax non-compliance in Latvia and improve the modelling of the fiscal sector. Several simulations demonstrate the advantages of the joint CGE-EUROMOD system over the individual macro and microsimulation models. The lack of income distribution aspect and the scarcity of fiscal instruments in CGE can be overcome by the features of EUROMOD. The CGE model, on the other hand, provides macroeconomic spillovers that are missing in the simulations of EUROMOD.

Suggested Citation

  • Konstantins Benkovskis & Ludmila Fadejeva & Anna Pluta & Anna Zasova, 2023. "Keeping the best of two worlds: Linking CGE and microsimulation models for policy analysis," Working Papers 2023/01, Latvijas Banka.
    • Handle: RePEc:ltv:wpaper:202301
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    File URL: https://datnes.latvijasbanka.lv/papers/WP_1-2023.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    EUROMOD; CGE model; model linkage; informal sector;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market

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