A method for full integration of a static Computable General Equilibrium model (a CGE model) in a Microsimulation model is proposed.
A method for full integration of a static Computable General Equilibrium model (a CGE model) in a Microsimulation model is proposed. The microsimulation model is a static model with a tax-benefit-module. Each household is described as a utility maximizing agent with a non-linear tax system and endogenous heterogeneous labor supplies. Conditions are specified such that sufficient aggregation is possible. The CGE model is a static model for a small open economy. It can have many good markets (up to several hundreds) and multiple labor markets. It is demonstrated that equilibrium in the total system can be calculated using 3 algorithms: 1) a Gauss-Seidel-like algorithm to solve for equilibrium good prices, 2) a linear algebra algorithm to solve for the quantities in the CGE-model and 3) an outer algorithm that calculates the wage rates and a public tax instrument that secures a balanced budget.