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Taxes and the Price Level; A Further Examination of the PPP Hypothesis


  • Ephraim Kleiman


The effects of taxation on the general price level have traditionally been regarded as reflecting monetary policy, rather than fiscal factors. This view abstracted from the possible endogeneity of monetary expansion with respect to tax hikes, and from the effects which taxation may have on the reserve price of entrepreneurial labor. An analysis of Purchasing Power Parity data for 51 countries from stage IV of the ICP project supports the hypothesis that domestic indirect taxes tend to raise the general price level. In contrast to the accepted view, other prices do not seem to decline to offset the effect of such taxes on the price of tradables. The paper also presents some new evidence on the other factors which cause national price levels to diverge from PPP.

Suggested Citation

  • Ephraim Kleiman, 1993. "Taxes and the Price Level; A Further Examination of the PPP Hypothesis," IMF Working Papers 93/5, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:93/5

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    References listed on IDEAS

    1. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    2. Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
    3. Ryo Kato & Shun Kobayashi & Yumi Saita, 2010. "Calibrating the Level of Capital: The Way We See It," Bank of Japan Working Paper Series 10-E-6, Bank of Japan.
    4. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    5. Alexander Klemm, 2007. "Allowances for Corporate Equity in Practice," CESifo Economic Studies, CESifo, vol. 53(2), pages 229-262, June.
    6. Slemrod, Joel, 2009. "Lessons for Tax Policy in the Great Recession," National Tax Journal, National Tax Association, vol. 62(3), pages 387-397, September.
    7. Thomas Hemmelgarn & Gaetan Nicodeme, 2010. "The 2008 Financial Crisis and Taxation Policy," Taxation Papers 20, Directorate General Taxation and Customs Union, European Commission.
    8. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    9. repec:nsr:niesrd:351 is not listed on IDEAS
    10. Michael Keen, 2011. "Rethinking the Taxation of the Financial Sector ," CESifo Economic Studies, CESifo, vol. 57(1), pages 1-24, March.
    11. Gordon, Roger H., 2010. "Taxation and Corporate Use of Debt: Implications for Tax Policy," National Tax Journal, National Tax Association, vol. 63(1), pages 151-174, March.
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    Cited by:

    1. Ephraim Kleiman, 1997. "National Price Levels: Do Taxes Matter?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(3), pages 361-377, July.
    2. Danijel Nestić, 2005. "Price Level Convergence: Croatia, Transition Countries and the EU," Working Papers 13, The Croatian National Bank, Croatia.
    3. Robert E. Lipsey & Birgitta Swedenborg, 1999. "Wage Dispersion and Country Price Levels," NBER Chapters,in: International and Interarea Comparisons of Income, Output, and Prices, pages 453-477 National Bureau of Economic Research, Inc.


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