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

Abstract

Article history: Available online xxxx JEL classification: C61 C68 D78 Keywords:Public policy Multicriteria decision making Computable general equilibrium model efficient frontier a b s t r a c t 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).

Shared value economics: an axiomatic approach

“…Thus, CP represents a good surrogate of the utility maximum for rational agents. This argument is corroborated by subsequent works on macroeconomics (André et al, 2008;Andre and Cardenete, 2009), microeconomics (Ballestero and Romero, 1998;Ballestero, 2000;, and portfolio selection (Ballestero, 1998;Ballestero and Pla-Santamaria, 2004). In the context of SVE, we rely on CP to study compromise solutions from an external analyst point of view when social and economic criteria are in conflict, i.e., when economic and social achievement is out of the "sweet-spot".…”

Using a Cge Model to Identify the Policy Trade-Off Between Unemployment and Inflation. The Efficient Phillips Curve

“…Nevertheless, since we have intentionally allowed for a very large range of policy combinations, it is not possible (not useful) to test all of them. Following the approach suggested in André and Cardenete (2009a;2009b), we focus on the set of so-called efficient policies. Following the classical Pareto criterion, we say that a policy combination x providing the objective values (u, π ) is efficient if there is not another feasible policy x providing (u , π ) such that, either u ≤ u and π < π or u < u and π ≤ π.…”

“…Moreover, since there is a virtually infinite number of policy mixes, we need a sensible criterion to determine which of them should be taken into account. Following André and Cardenete (2009a;2009b), we focus on so-called efficient policies, i.e. those policy mixes that are not Pareto-dominated from the point of view of the relevant policy objectives.…”