Public policies as specification errors
AbstractTreating public policies as computable dynamic general equilibrium model specification errors offers computational and conceptional advantages for comparing models with data. By calculating the set of policies that rationalize observed behavior, the substantive economic question then becomes whether, in any particular market, actual public policies sufficiently coincide with the model's behaviorrationalizing policy, or whether the model offers correct hypotheses about the determinants of demand and supply. As illustrations, public policies are calculated to rationalize, with respect to the stochastic neoclassical growth model, capital market behavior since WWII and labor market behavior 1929-50. One conclusion is that capital taxation drives a wedge between consumption growth and the expected pre-tax capital return, in the direction and amount predicted by the theory, and that capital taxation is the major intertemporal distortion in the postwar capital market. Second, a good theory of the Great Depression labor market must explain why measured MRS and MPL diverged so dramatically 1929-33 and why the wedge persisted. (Copyright: Elsevier)
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Bibliographic InfoArticle provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.
Volume (Year): 8 (2005)
Issue (Month): 4 (October)
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Find related papers by JEL classification:
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
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