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A Tax-Based Test for Nominal Rigidities

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

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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File URL: http://www.nber.org/papers/w1627.pdf
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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
Note: EFG PE
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  1. 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.
  2. Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
  3. Solow, Robert M, 1980. "On Theories of Unemployment," American Economic Review, American Economic Association, vol. 70(1), pages 1-11, March.
  4. 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.
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