Forecasts and constraints on policy actions: the reliability of alternative instruments

Multipliers are often used for selecting alternative policies in economic planning and forecasting. Particular variables like employment, trade balance, inflation or government budget usually impose constraints on the policy action. Therefore a criterion to be preferred to the raw multiplier should be a trade-off criterion which measures the effect of a variation of the instrument associated with a given cost on government budget, trade balance, etc. The trade-off criterion computed from a macroeconomic model is obviously affected by uncertainty to some extent; a criterion which appears to be strongly effective might at the same time be affected by such an high degree of uncertainty as to recommend against its use. The problem of uncertainty due to estimation errors will be investigated in this paper through experiments on the Mini-DMS model of the French economy.