A Tax-Based Test for Nominal Rigidities

James Poterba, Julio Rotemberg and Lawrence H. Summers

No 1627, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1985-06
Note: EFG PE
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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.

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Journal Article: A Tax-Based Test for Nominal Rigidities (1986)
Working Paper: A Tax-Based Test for Nominal Rigidities (1985)
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