Disaggregated Rural Economywide Models for Policy Analysis J. EDWARD TAYLOR University of California, Davis, USA GEORGE A. DYER and ANTONIO YU ´ NEZ-NAUDE * El Colegio de Me ´ xico, Mexico Summary. — This paper presents a disaggregated rural economywide modeling (DREM) approach to explore how agricultural and trade policy reforms play out within rural economies of less devel- oped countries (LDCs). DREMS combine the strengths of aggregate, computable-general equilib- rium (CGE), and microagricultural household models. We calibrate our model with new microsurvey data from Central Mexico, and we use the model to explore the impacts of policy changes on individual rural household groups as well as on the rural economy as a whole. Simu- lations highlight how rural market constraints and heterogeneous household responses shape the outcomes of policy reforms. Ó 2005 Elsevier Ltd. All rights reserved. Key words — agricultural policy, economywide models, agricultural household models, Latin America, Mexico 1. INTRODUCTION Interactions among households shape the im- pacts of policy reforms in rural economies. Micromodels offer insights into the behavior of households that are directly affected by pol- icy shocks; however, they miss interactions among households. Aggregate computable- general equilibrium (CGE) models capture interactions among sectors, but not the eco- nomic behavior of agricultural households. Neither approach offers insight into how policy shocks are transmitted through rural econo- mies, via interactions among diverse house- holds. The priorities of poverty alleviation and broad-based growth on development agendas, the globalization of agricultural markets, and the fact that most of the world’s population and poverty are concentrated in rural areas, make it essential for policy makers to have a microlevel understanding of the rural economy- wide impacts of policy reforms. This paper offers a methodology to explore the transmission of policy impacts through rural economies. The principal tool in our anal- ysis is a disaggregated rural economywide model (DREM), an extension of villagewide models (Taylor & Adelman, 1996). DREMs integrate micromodels of agricultural house- hold behavior with general equilibrium models of the rural economy, exploiting the strengths of each. They take into account the diversity of production activities, demand patterns, and technologies typically found in rural house- * We are grateful to Joe Dewbre and Jonathan Brooks for their encouragement and insightful comments on earlier drafts of this paper, to three anonymous referees whose suggestions significantly improved the manu- script, and to Catherine Taylor for her superb editorial assistance. Portions of this work were funded by the OECD Directorate for Agriculture, Food, and Fisheries; the William and Flora Hewlett Foundation; UC Mexus; and Mexico’s Consejo Nacional de Ciencia y Tecnologı ´a (CONACYT). Taylor is a member of the Gianni Foundation of Agricultural Economics. Final revision accepted: May 5, 2005. World Development Vol. 33, No. 10, pp. 1671–1688, 2005 Ó 2005 Elsevier Ltd. All rights reserved Printed in Great Britain 0305-750X/$ - see front matter doi:10.1016/j.worlddev.2005.05.003 www.elsevier.com/locate/worlddev 1671