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

  • André, Francisco J.
  • Cardenete, M. Alejandro

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 Multi-objective 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 it has 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).

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Article provided by Elsevier in its journal Socio-Economic Planning Sciences.

Volume (Year): 43 (2009)
Issue (Month): 3 (September)
Pages: 192-200

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Handle: RePEc:eee:soceps:v:43:y:2009:i:3:p:192-200
Contact details of provider: Web page: http://www.elsevier.com/locate/seps

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  1. Francisco J. André & M. Alejandro Cardenete, 2004. "Performing an Environmental Tax Reform in a Regional Economy: A Computable General Equilibrium Approach," Computing in Economics and Finance 2004 115, Society for Computational Economics.
  2. Hung, Ming-Lung & Yang, Wan-Fa & Ma, Hwong-Wen & Yang, Ya-Mei, 2006. "A novel multiobjective programming approach dealing with qualitative and quantitative objectives for environmental management," Ecological Economics, Elsevier, vol. 56(4), pages 584-593, April.
  3. Doerner, K.F. & Gutjahr, W.J. & Hartl, R.F. & Strauss, C. & Stummer, C., 2006. "Pareto ant colony optimization with ILP preprocessing in multiobjective project portfolio selection," European Journal of Operational Research, Elsevier, vol. 171(3), pages 830-841, June.
  4. P. L. Yu, 1973. "A Class of Solutions for Group Decision Problems," Management Science, INFORMS, vol. 19(8), pages 936-946, April.
  5. Nicolaas Groenewold & Alfred Hagger & John Madden, 2003. "Interregional transfers: A political-economy CGE approach," Papers in Regional Science, Springer, vol. 82(4), pages 535-554, November.
  6. Kehoe, Timothy J & Polo, Clemente & Sancho, Ferran, 1995. "An Evaluation of the Performance of an Applied General Equilibrium Model of the Spanish Economy," Economic Theory, Springer, vol. 6(1), pages 115-41, June.
  7. Gabriel, Steven A. & Faria, Jose A. & Moglen, Glenn E., 2006. "A multiobjective optimization approach to smart growth in land development," Socio-Economic Planning Sciences, Elsevier, vol. 40(3), pages 212-248, September.
  8. Willenbockel, Dirk, 2004. "Specification choice and robustness in CGE trade policy analysis with imperfect competition," Economic Modelling, Elsevier, vol. 21(6), pages 1065-1099, December.
  9. Fernandez, Elena & Puerto, Justo, 2003. "Multiobjective solution of the uncapacitated plant location problem," European Journal of Operational Research, Elsevier, vol. 145(3), pages 509-529, March.
  10. Yao, Shujie & Liu, Aying, 2000. "Policy Analysis in a General Equilibrium Framework," Journal of Policy Modeling, Elsevier, vol. 22(5), pages 589-610, September.
  11. Gabriel, Steven A. & Kumar, Satheesh & Ordonez, Javier & Nasserian, Amirali, 2006. "A multiobjective optimization model for project selection with probabilistic considerations," Socio-Economic Planning Sciences, Elsevier, vol. 40(4), pages 297-313, December.
  12. repec:cup:cbooks:9780521266550 is not listed on IDEAS
  13. repec:cup:cbooks:9780521319867 is not listed on IDEAS
  14. Schafer, Andreas & Jacoby, Henry D., 2005. "Technology detail in a multisector CGE model: transport under climate policy," Energy Economics, Elsevier, vol. 27(1), pages 1-24, January.
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