Macro-Micro Models

Since the late seventies, researchers and policy makers have sought to analyse and simulate the impacts of macro policy reforms on income distribution. Concerns such as the social implications of structural adjustment policies, poverty/inequality effects of trade liberalization, pro-poor or inclusive growth or the poverty impacts of the global food and, subsequently, financial and economic crisis have driven this research agenda.This type of analysis requires tools that combine both macro and micro frameworks. The integration of microsimulation techniques within a computable general equilibrium (CGE) model constitutes such a tool. While CGE models focus on the sectoral, macro and price effects of major policy reforms, they generally fail to adequately capture distributive impacts. On the other hand, microsimulation techniques focus on the household- and individual-specific distributive effects, but are generally confined to micro reforms as they are unable to model general equilibrium effects – notably on the prices of factors and products, as well as other macro variables – of macro reforms. Combining these tools allows the analyst to track the impact of a major policy change or external shock on macroeconomic or sectoral variables down to the change in income or welfare at the household level. The flexibility of both tools has allowed inter alia for distributional impact analysis of various policies and programs in the context of the Millennium Development Goals and the Monterrey Consensus