Incorporating household survey data into a CGE model

Incorporating multiple households in a computable general equilibrium (CGE) model can enhance the capability of conventional CGE models to analyse a wide range of issues, such as income distribution effects and tax-transfer policies. Traditionally, these issues are analysed with microsimulation (MS) models. To capture general equilibrium effects, a two-model approach is sometimes used, which links a MS model with a CGE model. Incorporating a full sample of households from survey data into a CGE framework has been regarded as difficult and costly. So far, only few attempts have been made to produce fully integrated models. In fact, incorporating multiple households into a CGE model is conceptually straightforward. With a simple structured CGE model, a large number of households can be readily incorporated and the integrated model can still be solved efficiently. This paper uses an Australian Household Expenditure Survey (HES) data to describe a simple procedure to integrate an entire sample of households into a CGE framework. The model used is a conventional one, so that the same procedure can be adapted to other CGE models with minimum modifications. The integrated model eliminates three types of errors associated with the two-model approach: aggregation errors due to the single representative household in the CGE model and the multiple households in the integrated model; partial equilibrium errors, due to the lack of feedback from the MS model to the CGE model; and inconsistency errors caused by the differences between the two databases used. The integrated model provides a useful framework to analyse the distributional effects of policy changes on individual households in a general equilibrium framework. It can also be used to analyse detailed tax-transfer policies at the real household level.