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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.

Suggested Citation

  • James M. Poterba & Julio J. Rotemberg & Lawrence H. Summers, 1985. "A Tax-Based Test for Nominal Rigidities," NBER Working Papers 1627, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1627
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    4. 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.
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    1. Lipińska, Anna & von Thadden, Leopold, 2019. "On The Effectiveness Of Fiscal Devaluations In A Monetary Union," Macroeconomic Dynamics, Cambridge University Press, vol. 23(8), pages 3424-3456, December.
    2. Buiter, Willem H., 2017. "Exchange rate implications of Border Tax Adjustment neutrality," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 11, pages 1-41.
    3. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
    4. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050, Elsevier.
    5. Wolf, Martin, 2020. "Pecuniary externalities in economies with downward wage rigidity," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 219-235.
    6. Blinder, Alan S, 1988. "The Challenge of High Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 1-15, May.
    7. Kashif Munir & Maryam Sultan, 2018. "Are some taxes better for growth in Pakistan? A time series analysis," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 45(10), pages 1439-1452, August.
    8. Christopher Erceg & Andrea Prestipino & Andrea Raffo, 2018. "The Macroeconomic Effect of Trade Policy," 2018 Meeting Papers 221, Society for Economic Dynamics.
    9. Daniel R. Feenberg & Andrew W. Mitrusi & James M. Poterba, 1997. "Distributional Effects of Adopting a National Retail Sales Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 49-90, National Bureau of Economic Research, Inc.
    10. Wolf, Martin, 2020. "Pecuniary externalities in economies with downward wage rigidity," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 219-235.
    11. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 157-178, June.
    12. Myers, Robert J. & Oehmke, James F., 1987. "Instability and Risk as Rationales for Government Intervention in Agriculture," Staff Paper Series 200938, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    13. Yongzheng Liu & Jorge Martinez-Vazquez, 2015. "Growth–Inequality Tradeoff in the Design of Tax Structure: Evidence from a Large Panel of Countries," Pacific Economic Review, Wiley Blackwell, vol. 20(2), pages 323-345, May.
    14. 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.
    15. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2003. "The role of taxes as automatic destabilizers in New Keynesian economics," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1123-1136, May.
    16. Sun, Rongrong, 2013. "Does monetary policy matter in China? A narrative approach," China Economic Review, Elsevier, vol. 26(C), pages 56-74.
    17. 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.
    18. Jorge Martinez-Vazquez & Violeta Vulovic & Yongzheng Liu, 2011. "Direct versus Indirect Taxation: Trends, Theory, and Economic Significance," Chapters, in: Emilio Albi & Jorge Martinez-Vazquez (ed.), The Elgar Guide to Tax Systems, chapter 2, Edward Elgar Publishing.
    19. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-577, November.
    20. Alvin Ó Murchú, 2002. "Tax Policy and OECD Unemployment," Working Papers 200231, School of Economics, University College Dublin.
    21. Gurbachan Singh, 2014. "Overcoming Zero Lower Bound on Interest Rate without any Inflation or Inflationary Expectations," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(1), pages 1-38, June.
    22. Facundo Alvaredo & Thomas Breda & Barra Roantree & Emmanuel Saez, 2017. "Contribution Ceilings and the Incidence of Payroll Taxes," De Economist, Springer, vol. 165(2), pages 129-140, June.
    23. Shah, Anwar, 1988. "Public infrastructure and private sector profitability and productivity in Mexico," Policy Research Working Paper Series 100, The World Bank.
    24. Stoyan Tanchev, 2019. "Tax structure and economic growth: empirical evidence from Bulgaria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 24-41,42-58.
    25. 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.

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