Introduction section CGE Model - ORANI-IT & TERMITY

CGE Model - ORANI-IT & TERMITY

ORANI-IT is a comparative-static, multi-sectoral, national Computable General Equilibrium (CGE) tax model for Italy, designed at the Department of Treasury of the Italian Ministry of the Economy and Finance in collaboration with the Centre of Policy Studies ( CoPS ) and currently managed at Sogei S.p.A. ( IT Economia - Modelli di Previsione ed Analisi Statistiche).

The theoretical model, rooted in neoclassical theory, is structured in terms of behavioral equations and identities, which equal under macro balancing conditions. The theoretical framework feeds into the database, built on national accounts data, that comes to represent the benchmark economy. The model is static, with the time dimension, split into long and short run, implied by the variables’ allocation between endogenous and exogenous.

ORANI-IT is fairly disaggregated, with 63 commodities and 63 industries, and presents a specification of labor demand by age, gender, sector and professional position.

It incorporates a fiscal extension, which consists of the explicit modeling of the full range of Italian direct and indirect taxes. In particular, the model features an extremely detailed indirect tax matrix by commodity, user, source and tax type, allowing for a number of fiscal tools enriching the analytical capacity of the national model. Within the fiscal extension, the full legislated complexity of the Italian Value-Added-Tax (VAT) system is accommodated, via a comprehensive economy-wide framework for VAT.

ORANI-IT also reproduces economic sector accounts for the institutional agents, with detailed equations describing revenue and expenditure items, allowing for a complex description of household and government behavior.

The fiscal extension is a powerful analytical tool for acquiring new insights on the Italian fiscal system, through the assessment of tailored fiscal reforms, which can consist of either changes in tax rates and tax bases. The multi-sectoral supply-demand interaction and the multi-production structure of the economy make the model especially well-suitable for the assessment of industrial policy, with results generated at national and sectoral level.

The current comparative-static national model was further developed, evolving into a dynamic, multi-regional CGE tax model for Italy in 2015. The output, TERMITY, will be a suitable tool for the assessment of regional policies.

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