Solving a partial equilibrium model in a CGE framework: the case of a BMS model

This paper presents a new approach to decompose an integrated computable general equilibrium (CGE) model into a partial equilibrium (PE) model and a residual CGE model. This opens up the scope for richer analysis of policy relevant matters by expending the PE sub-model in selected circumstances. Specifically, this paper outlines how to integrate a behavioural microsimulation (BMS) model within a CGE framework. It then shows how the household module can be separated from the CGE model and how the resulting PE sub-model and CGE model can be solved iteratively, so that the equilibrium is identical to that of the integrated model. The paper focuses on two challenges that arise when linking and solving two different models: how to find a convergent solution and how to ensure it is the true general equilibrium solution. This involves ensuring that databases and theory in both models are consistent and fit exactly with each other. Some cases may require the use of a slack variable to account for temporary inconsistencies between the two models. This approach has the potential to extend the range and quality of the analysis of policy relevant issues. For example, using a microsimluation framework for the household sub-model, makes a richer analysis of the household sector transfer and tax system possible. Further work is required to investigate whether the general framework used for this specific partitioning of the structure of the model can be applied to structural partitions that relate to the other parts (eg the inter-industry part) of a CGE model.