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A Tax-Based Test for Nominal Rigidities

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  • James M. Poterba
  • Julio J. Rotemberg
  • Lawrence H. Summers

Abstract

In classical macroeconomic models with flexible wages and prices,whether a tax is levied on producers or consumers does not affect its incidence. However, if wages or prices are rigid in the short run, as they are in Keynesian macroeconomic models, then shifting a tax from one side ofthe market to the other may have real effects. Tax changes therefore provide potential tests for the presence of nominal rigidities. This paper examines the price and output effects of revenue-neutral shifts between direct and indirect taxation. The results, based on post-war data from both Great Britain and the United States, reject the view that wages and prices are completely flexible in the short run.

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 376.

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Date of creation: May 1985
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Handle: RePEc:mit:worpap:376

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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Web page: http://econ-www.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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References

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  1. Rotemberg, Julio J., 1983. "Monetary policy and costs of price adjustment," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 5(1), pages 267-288, February.
  2. Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
  3. Sargan, J D, 1980. "The Consumer Price Equation in the Post War British Economy: An Exercise in Equation Specification Testing," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 113-35, January.
  4. Solow, Robert M, 1980. "On Theories of Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 70(1), pages 1-11, March.
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Cited by:
  1. Anna Lipinska & Leopold von Thadden, 2012. "On the (in)effectiveness of fiscal devaluations in a monetary union," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-71, Board of Governors of the Federal Reserve System (U.S.).
  2. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2003. "The role of taxes as automatic destabilizers in New Keynesian economics," Journal of Public Economics, Elsevier, Elsevier, vol. 87(5-6), pages 1123-1136, May.
  3. Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc.
  4. Blinder, Alan S, 1988. "The Challenge of High Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 1-15, May.
  5. Timothy J. Besley & Harvey S. Rosen, 1998. "Sales Taxes and Prices: An Empirical Analysis," NBER Working Papers 6667, National Bureau of Economic Research, Inc.
  6. Shah, Anwar, 1988. "Public infrastructure and private sector profitability and productivity in Mexico," Policy Research Working Paper Series 100, The World Bank.
  7. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, Econometric Society, vol. 67(5), pages 1113-1156, September.
  8. James M. Poterba, 1993. "Global Warming Policy: A Public Finance Perspective," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(4), pages 47-63, Fall.
  9. Yongzheng Liu & Jorge Martinez-Vazquez, 2010. "The Growth-Inequality Tradeo in the Design of Tax Structure: Evidence from a Large Panel of Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1320, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  10. James M. Poterba, 1991. "Tax Policy to Combat Global Warming: On Designing a Carbon Tax," NBER Working Papers 3649, National Bureau of Economic Research, Inc.
  11. Henry, Jerome & Hernandez de Cos, Pablo & Momigliano, Sandro, 2008. "The impact of government budgets on prices: Evidence from macroeconometric models," Journal of Policy Modeling, Elsevier, Elsevier, vol. 30(1), pages 123-143.
  12. Daniel R. Feenberg & Andrew W. Mitrusi & James M. Poterba, 1997. "Distributional Effects of Adopting a National Retail Sales Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 49-90 National Bureau of Economic Research, Inc.

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