Uncertainty in Structural and Institutional Parameters and the cost of policy mistakes: a CGE evaluation

CHISARI, OMAR O., GUSTAVO FERRO Y JUAN PABLO VILA MARTÍNEZ

Buenos Aires

Conferencia; Conferencia en Homenaje a Roberto Frenkel; 2012

In this paper we focus on Roberto Frenkel?s emphasis on the role institutions and structural parameters play in macroeconomic policy design and test the differential effects of policy shocks on two structural parameters: the degree of international capital mobility and the rules of wage indexation practiced in the economy. Policymakers find it difficult to evaluate the levels of these parameters. We hypothesize that the greater the degree of international capital mobility and the more complete the indexation of the formal labor market wages are, ceteris paribus, the greater the damage and regret arising from bad policies will be. To illustrate the intuition, we evaluate counterfactual changes in taxation in the Argentine economy using a Computable General Equilibrium (CGE) Model with unemployment calibrated with 2006 data. In general, the simulations confirm the intuition and show that policy mistakes (diagnosis failures) are costlier when the degree of capital mobility is greater; they also show that the rules to determine salaries could amplify the losses. Additionally, we discuss the choice of taxes that an optimistic and a pessimistic policymaker will make under Knightian uncertainty.