Working Paper
Microsimulation, CGE and Macro Modelling for Transition and Developing Economies

Alternative approaches to modelling distributional and welfare effects of changes in policy and the economic environment in developing and transition countries are surveyed. Microsimulations range from pure accounting approaches to models with behavioural equations based on econometric estimates and various dynamic models. Microsimulation accounting models are key to analysing the impact effects of tax and benefit changes and are becoming widespread. Computable general equilibrium (CGE) modelling endogenizes price changes and changes in industry and labour market structure. An essential CGE input is a social accounting matrix (SAM), which can be used to do simple multiplier analyses. A wide range of macroeconomic models have also been used in developing countries, endogenizing variables like interest rates and exchange rates. In recent years a number of studies have combined the different model types. This is essential for full distributional analysis. Layered CGE-microsimulation models have been used by World Bank researchers and others to examine, for example, the impacts of the financial crisis of the late 1990s in Southeast Asia. An alternative to these ‘top down’ models is to fully integrate CGE and microsimulation, as pursued by IDRC/MIMAP research teams. The latter approach yields important insights and is theoretically appealing, but a layered model may be better able to capture the peculiarities of real-world behaviour and constraints, especially in the short run. The approaches should thus be viewed as complements rather than substitutes.