Defining efficient policies in a general equilibrium model: a multi-objective approach



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André García, Francisco Javier and Cardenete, M. Alejandro (2008) Defining efficient policies in a general equilibrium model: a multi-objective approach. Socio-Economic Planning Sciences, 43 (3). pp. 192-200. ISSN 0038-0121

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Macroeconomic policy makers are typically concerned with several indicators of economic performance. We thus propose to tackle the design of macroeconomic policy using Multicriteria Decision Making (MCDM) techniques. More specifically, we employ Multiobjective Programming (MP) to seek so-called efficient policies. The MP approach is combined with a computable general equilibrium (CGE) model. We chose use of a CGE model since they have the dual advantage of being consistent with standard economic theory while allowing one to measure the effect(s) of a specific policy with real data. Applying the proposed methodology to Spain (via the 1995 Social Accounting Matrix) we first quantified the trade-offs between two specific policy objectives: growth and inflation, when designing fiscal policy. We then constructed a frontier of efficient policies involving real growth and inflation. In doing so, we found that policy in 1995 Spain displayed some degree of inefficiency with respect to these two policy objectives. We then offer two sets of policy recommendations that, ostensibly, could have helped Spain at the time. The first deals with efficiency independent of the importance given to both growth and inflation by policy makers (we label this set: general policy recommendations). A second set depends on which policy objective is seen as more important by policy makers: increasing growth or controlling inflation (we label this one: objective-specific recommendations).

Item Type:Article
Uncontrolled Keywords:Public policy, Multicriteria decision making, Computable general equilibrium model efficient frontier.
Subjects:Sciences > Mathematics > Bayesian statistical decision theory
Social sciences > Economics > Macroeconomics
JEL:C61, C38, D78
ID Code:39539
Deposited On:25 Oct 2016 08:07
Last Modified:25 Oct 2016 08:07

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