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A Tax-Based Test for Nominal Rigidities

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

Abstract

In classical macroeconomic models with flexible wages and prices, whether a tax is levied on producers or consumers does not affect itsultimate incidence. If wages or prices are rigid in the short run, however, then shifting a tax from one side of the market to the othermay have real effects. Tax changes, therefore, provide potential testsfor the presence of nominal rigidities. This paper examines the priceand output effects of revenue-neutral shifts between direct and indirect taxation. The results provide evidence against the view thatwages and prices are completely flexible in the short run. Copyright 1986 by American Economic Association.

Suggested Citation

  • Poterba, James M & Rotemberg, Julio J & Summers, Lawrence H, 1986. "A Tax-Based Test for Nominal Rigidities," American Economic Review, American Economic Association, vol. 76(4), pages 659-675, September.
    • Handle: RePEc:aea:aecrev:v:76:y:1986:i:4:p:659-75
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