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Public policies as specification errors

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  • Casey B. Mulligan

    (University of Chicago)

Abstract

Treating 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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File URL: http://dx.doi.org/10.1016/j.red.2005.01.014
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 4 (October)
Pages: 902-926

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Handle: RePEc:red:issued:v:8:y:2005:i:4:p:902-926

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Related research

Keywords: Computable dynamic general equilibrium models; Market distortions; Taxes;

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References

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  1. Robert J. Barro & Chaipat Sahasakul, 1983. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," NBER Working Papers 1214, National Bureau of Economic Research, Inc.
  2. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
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  5. Harold L. Cole & Lee E. Ohanian, 2001. "New Deal policies and the persistence of the Great Depression: a general equilibrium analysis," Working Papers 597, Federal Reserve Bank of Minneapolis.
  6. Rees, Albert, 1989. "The Economics of Trade Unions," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226707105.
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  8. R. Anton Braun & Ellen R. McGrattan, 1993. "The Macroeconomics of War and Peace," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 197-258 National Bureau of Economic Research, Inc.
  9. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24.
  10. Seater, John J., 1985. "On the construction of marginal federal personal and social security tax rates in the U.S," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 121-135, January.
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Cited by:
  1. Shu-Shiuan Lu, 2012. "East Asian growth experience revisited from the perspective of a neoclassical model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 359-376, July.
  2. John Bailey Jones & Sohini Sahu, 2008. "Transition Accounting for India in a Multi-Sector Dynamic General Equilibrium Model," Discussion Papers 08-03, University at Albany, SUNY, Department of Economics.
  3. Amartya Lahiri & Kei-Mu Yi, 2006. "A tale of two states: Maharashtra and West Bengal," Working Papers 06-16, Federal Reserve Bank of Philadelphia.
  4. Casey B. Mulligan, 2011. "Rising Labor Productivity during the 2008-9 Recession," NBER Working Papers 17584, National Bureau of Economic Research, Inc.
  5. Lu, Shu-Shiuan, 2013. "The role of capital market efficiency in long-term growth: A quantitative exploration," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 161-174.
  6. Casey B. Mulligan, 2013. "Uncertainty, Redistribution, and the Labor Market," NBER Working Papers 19553, National Bureau of Economic Research, Inc.

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