Uncertainty in Structural and Institutional Parameters and the Cost of Policy Mistakes
Uncertainty in Structural and Institutional Parameters and the Cost of Policy Mistakes
A Computable General Equilibrium Evaluation
this chapter analyses the role of parameter uncertainty in the design of macroeconomic policy. The authors use a Computable General Equilibrium (CGE) model to evaluate the effects of policy intervention (changes in the tax policy) when the policy maker is uncertain about the right level of two key parameters: the degree of international capital mobility and the degree of wage indexation in the economy. The experiments show that the greater the degree of international capital mobility and the higher the degree of indexation in the formal labor market, the greater the damage wrong policy choices will produce.
Keywords: CGE models, parameter uncertainty, capital mobility, wage indexation, tax policy
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