The Smallest General-Equilibrium Model in the World - Major Lessons for Tax Policy

Abstract

General-Equilibrium (GE) models were revived in the mid 1980s, in the computable form allowed by the progresses of information technology. They have been applied to the assessment of many economic policies, especially taxation, international trade and intergenerational transfers. A new recent development consists of dynamic stochastic general-equilibrium models. This paper builds on work done at the time of the emergence of computable GE models, and aims at presenting as simply and pedagogically as possible the concept of general equilibrium, its limitations and some of its lessons, in the field of taxation and tax policy. Those lessons do not always get the attention they deserve.