Computable General Equilibrium Models and Their Use in Economy-Wide Policy Analysis: Everything You Ever Wanted to Know (But Were Afraid to Ask)

This paper is a simple, rigorous, practically-oriented exposition of computable general equilibrium (CGE) modeling. The general algebraic framework of a CGE model is developed from microeconomic fundamentals, and employed to illustrate (i) how a model may be calibrated using the economic data in a social accounting matrix, (ii) how the resulting system of numerical equations may be solved for the equilibrium values of economic variables, and (iii) how perturbing this equilibrium by introducing tax or subsidy distortions facilitates analysis of policies’ economy-wide impacts.