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Abstract

This paper is ongoing work by the Centre of Policy Studies and the Impact Project that integrates the ideas of micro simulation with Computable General Equilibrium (CGE) modelling. In micro simulation the behaviour of individuals or households is modelled directly, typically using unit record data, whereas CGE models place an emphasis on market interactions and can take account of the indirect effect on households of changes in market conditions. For many policy issues (such as taxation reform), a combination of the two approaches is desirable so that both the direct and the indirect effects of such reform can be addressed. What is needed is for unit record data to be used in combination with a CGE model; that is, for the modelling of households to be combined with the modelling of markets. This can be achieved by embedding a detailed household sector in an CGE model. The solution of the model then provides distributional results for the representative households directly. In this paper a detailed household sector comprising 100 types of households — differentiated by income and demographic grouping — is developed and embedded in the MONASH Model. Simulations are conducted that measure the economy wide effects of redistributing income across these households.

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