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A Tax-Based Test for Nominal Rigidities

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

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.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 76 (1986)
Issue (Month): 4 (September)
Pages: 659-75

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Handle: RePEc:aea:aecrev:v:76:y:1986:i:4:p:659-75
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  1. Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
  2. Solow, Robert M, 1980. "On Theories of Unemployment," American Economic Review, American Economic Association, vol. 70(1), pages 1-11, March.
  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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