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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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1627.

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Date of creation: Jun 1985
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Publication status: published as Poterba, James M., Julio J. Rotemberg and Lawrence H. Summers."A Tax-Based Test for Nominal Rigidities," American Economic Review, Vol. 76, No. 4, (September 1986), pp. 659-675.
Handle: RePEc:nbr:nberwo:1627

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  1. Solow, Robert M, 1980. "On Theories of Unemployment," American Economic Review, American Economic Association, vol. 70(1), pages 1-11, March.
  2. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February.
  3. Rotemberg, Julio J., 1983. "Monetary policy and costs of price adjustment," Journal of Economic Dynamics and Control, Elsevier, vol. 5(1), pages 267-288, February.
  4. 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, vol. 47(1), pages 113-35, January.
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Cited by:
  1. 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 paper1320, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Timothy J. Besley & Harvey S. Rosen, 1998. "Sales Taxes and Prices: An Empirical Analysis," NBER Working Papers 6667, National Bureau of Economic Research, Inc.
  3. Blinder, Alan S, 1988. "The Challenge of High Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 1-15, May.
  4. Daniel R. Feenberg & Andrew W. Mitrusi & James M. Poterba, 1997. "Distributional Effects of Adopting a National Retail Sales Tax," NBER Working Papers 5885, National Bureau of Economic Research, Inc.
  5. 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, vol. 30(1), pages 123-143.
  6. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
  7. von Thadden, Leopold & Lipinska, Anna, 2013. "On the (In)effectiveness of Fiscal Devaluations in a Monetary Union," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80038, Verein für Socialpolitik / German Economic Association.
  8. 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.
  9. Claus Thustrup Hansen & Henrik Jacobsen Kleven, 2000. "The Role of Taxes as Automatic Destabilizers in New Keynesian Economics," CESifo Working Paper Series 399, CESifo Group Munich.
  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. Shah, Anwar, 1988. "Public infrastructure and private sector profitability and productivity in Mexico," Policy Research Working Paper Series 100, The World Bank.
  12. James M. Poterba, 1993. "Global Warming Policy: A Public Finance Perspective," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 47-63, Fall.

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