Introduction sectionMACGEM-IT - A New CGE model for Italy

MACGEM-IT - A New CGE model for Italy

MACGEM-IT is a static Computable General Equilibrium Model (CGE) for the Italian economy created by the Direction I at the Treasury Department in cooperation with the Department of Economics and Law of the University of Macerata. Built to reflect the characteristics of Italian economy, MACGEM-IT is able to quantify the disaggregated, direct and indirect impacts of fiscal policies.

The model is based on the economic flows identified by the national accounting system and it follows the assumptions on functions and exogenous parameters that are generally accepted. MACGEM-IT model formalizes the relationships among agents in the economy by modelling the functions of behaviours (production, consumption and accumulation) which are able to represent the interdependencies among activities, primary factors and institutional sectors.

Although its framework traces the general equilibrium model, MACGEM-IT includes proper rigidities and imperfections regarding the behaviour of some agents and markets, such as the Government and the labour market.

The impacts of policy measures are observed within the income circular flow and are assessed through the main macroeconomic aggregates’ performance, expressed both in real and nominal terms, and are broken down by commodity, activity and Institutional Sector.

In its current version, MACGEM-IT is a static and disaggregated model with multi-input and multi-output production functions. Each agent maximises its own objective function represented by:
the maximum profit given the production capacity for activities;
the maximum utility given the resources exogenously determined for Institutional Sectors (Households, Firms, Government and Rest of the World).

As mentioned, the production of goods and services by activity (multi-output production function) is modelled using a nested production function in order to capture the substitutions and complements across primary factors and/or intermediate goods in the production process (multi-input production function).

Flows that refers to Government are fully detailed in MACGEM-IT. It takes into consideration the current institutional and regulatory framework, outlining the complex transmission mechanisms of the policy measures with respect to the creation of Government revenues and expenditures.

More specifically, taxes are modelled in detail according to the current fiscal regulation in order to reflect the actual tax bases and tax rates. They also include taxes on products, taxes on activities and taxes on incomes.

According to its characteristics, MACGEM-IT is therefore able to quantify the overall and sectoral impact of those policies having a sectoral feature on both the production and income side. The simulation of fiscal policies designed to stimulate different types of final demand, to support specific activities and/or production and/or goods, are just a few of the possible application of MACGEM-IT.

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