A Tax-Based Test for Nominal Rigidities (Classic Reprint)

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Excerpt from A Tax-Based Test for Nominal RigiditiesAfter rejecting these null hypotheses, we focus on the relevance of these rejections for the presence of nominal rigidities. If nominal rigidities are present, then we expect prices to rise and output to fall for some time after a tax switch. The response of real wages depends on whether price or wage rigidities are more important. To investigate these dynamic effects, we compute our systems' predicted responses to a permanent change in tmix. We also followed Mishkin's (1979) approach and examined the effect of a tmix impulse given its actual stochastic process. This procedure avoids the problems which might arise if permanent shocks to tmix are widely at variance with the historical experience. Because the results were very similar to those for permanent shocks, only the latter are reported in Section IV.The reduced forms described above may be subject to some of the criticisms which have been directed at the vector autoregression approach of Sims We have not posited an explicit structural model, and the parameters in our reduced forms might vary with changes in the policy regime. However, we use our reduced forms only to estimate the effects of certain policy changes within a given policy regime. Our view is not that our equations explain how tmix could be used as a major tool of stabilization policy, or evenfthe effects of radical changes in the tmix variable outside the sample experience. Rather, we believe that the estimated response of prices and output to changes in tmix, given the current policy regime, can shed light on the existence of nominal rigidities.About the PublisherForgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.comThis book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully, any imperfections that remain are intentionally left to preserve the state of such historical works.