The microsimulation models represent a valid approach for introducing the distributional dimension in a CGE framework and allow assessing inequality and poverty changes induced by a shock. The paper describes the development of a non-behavioural microsimulation model and its application to evaluate the distributional impacts of a policy reducing fossil fuel subsidies in Indonesia. The creation of the microsimulation link involves the analysis of 2007 Indonesian household survey (IFLS4, World Bank) and a reconciliation procedure with the Indonesian Social Accounting Matrix using the Cross-Entropy method. Around 10000 different households heterogeneous with respect to income sources and expenditure choices and consistent with the macroeconomic variables are represented in the microsimulation module.

The policy scenario, implemented using ENV-Linkages model, determines a change in prices, factor remuneration and transfers.  The impact of this reform on households’ welfare is analysed considering two different revenue recycling schemes (unconditioned lump-sum transfer to all households and increased governmental expenditure). Despite the limited decrease of fossil fuel subsidy, the reform has a non-negligible impact on welfare, especially for the lower deciles. The first scenario results strongly progressive and the second one is slightly regressive.

This seminar has been jointly organized by FEEM and IEFE, Bocconi University.