How can tax policies and macroeconomic shocks affect the poor? : a quantitative assessment using a computable general equilibrium framework for Colombia

Abstract

During the past decade, particularly after the 1998-99 Colombian economic recession, economists have developed a renewed interest in the analysis and evaluation of welfare changes induced by public policies and economic shocks. The existing instruments to do this kind of exercises have usually lacked or excluded detailed microeconomic information that is relevant in the understanding and determination of the channels through which macroeconomic shocks affect the income distribution structure in Colombia. As a result, this research intends to fulfill this gap by presenting a simple static applied general equilibrium model in which a micro-macro link was built by reconciling the 1997 quality of life survey data with aggregates of the national accounts system. Specifically, by introducing a set of 8,701 households within a consistent macroeconomic framework, the model is able to produce poverty and income distribution indicators for specific segments of the population in four simulated scenarios: a reduction of tariffs, a general VAT rate for all products, a fall of the foreign inflows and a rise of the government obligations with the rest of the world. Despite the simple Arrow-Debreu structure implemented here, the estimated results are qualitatively and quantitatively important, specially in measuring the inequality and poverty changes that can arise as response of exogenous shocks.