A challenging issue in global applied Computable General Equilibrium (CGE) models concerns the formalization of the government agent. Examples are the GTAP based models (as ICES), where there is not an explicit government but it is considered as part of a broader regional household. Here, a tax cut stimulates more public consumption in the economy as no public budget constraint is modelled. The aim of this paper is to present the methodology to explicitly introduce the public budget constraint and to make a clear link between tax receipts and public expenditures. Our work focuses both on the database and the model. We insert additional information to complete the GTAP database for the part related to the public finance. In the model we change the macro-economic closure between savings and investments and we link taxes and expenditures allowing the government to create debt.
- jel: C68, D58, H60
- Keywords: CGE models, public sector, Government budget.