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

Authors

Konstantins Beņkovskis, Ludmila Fadejeva, Anna Pluta, Anna Zasova

Publication Date

Jul 2023

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 bottomup 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.

Publication type

EUROMOD Working Paper Series

Series Number

EM2/23

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