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Claiming the Usefulness of Relative Welfare Indicators in General Equilibrium Analysis:A Comprehensive Comparison of VAT Reforms

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  • Ana-Isabel Guerra

Abstract

The evaluation of welfare effects should be clear and presented in an easy to interpret manner. In this paper, we show that on these grounds the true index of cost of living, first introduced by Konüs (1939), is preferable to the standard absolute indicators when evaluating welfare effects in static applied general equilibrium models i.e. the equivalent and the compensated variations. In these applied models, it is customary to use linearly homogeneous utility functions such as Cobb-Douglas or the more general CES specification. Under this class of utilities, the Konüs index is independent of the reference level of utility. This makes this index an unambiguous cost of living indicator. Lastly, to show the convenience of using the Konüs index in empirical work, we have carried out an original exercise with a novel data set for the Spanish economy. We report the macroeconomic and welfare impacts of two alternative Value-Added Tax Reforms through the application of an original simulation strategy.

Suggested Citation

  • Ana-Isabel Guerra, 2018. "Claiming the Usefulness of Relative Welfare Indicators in General Equilibrium Analysis:A Comprehensive Comparison of VAT Reforms," UFAE and IAE Working Papers 964.18, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    • Handle: RePEc:aub:autbar:964.18
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    Keywords

    Cost of living indices; applied general equilibrium analysis; tax reforms; fiscal policies.;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D69 - Microeconomics - - Welfare Economics - - - Other
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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