the phillips curve macroeconomic policy and the welfare of canadians a review of the two competing paradigms explaining inflation and unemployment fluctuations singles out the keynesian phillips curve as the clear empirical winner over its classic competitors reestimation of the canadian phillips curve for 1957 90 identifies a sharp structural shift toward a high degree of unemployment hysteresis after 1972 the recent attempt of macropolicy to flatten the aggregate demand curve and limit supply side shock accommodation which aims at lower and more stable inflation is then shown to make unemployment higher and more unstable on average to an extent that is an increasing function of the degree of hysteresis understanding and reducing hysteresis and developing a consensus based incomes policy that has a chance of alleviating the dismal trade off should therefore to top research and policy priorities

supply side macro economics this paper tests new classical and keynesian explanations of output determination within an encompassing factor utilization model wherein the output decision by producers is modelled as the choice of a utilization rate for employed factors in this encompassing model the ratio of actual to normal output with the latter defined by a nested ces vintage production function with capital energy and employment as factor inputs is explained by unexpected sales a keynesian element abnormal profitability one component of which is the lucas price surprise effect and abnormal inventories results using canadian data show that the keynesian and new classical elements contribute explanatory power as does the production function based measure of normal output while each of these partial models is strongly rejected in favour of the encompassing model the highly structured factor utilization model is also seen to fit better than an unstructured var model u s data confirm the results and show that there are significant effects from abnormal demand profitability and inventory levels even if the labour and capital components of normal output are defined using hours and utilized capital rather than employment and the capital stock the results are also confirmed using alternative output and hence input concepts using a translog function instead of a ces function to define normal output and using data for several other major industrial countries this abstract was borrowed from another version of this item

stylized facts and stylized illusions inflation and productivity revisited recent estimates of a negative empirical relationship between inflation and the rate of growth of productivity provide a strong case for vigorous anti inflationary policy this paper tests the robustness of this evidence using long quarterly and annual datasets for four countries canada united states united kingdom west germany our results from cointegration and other time series tests show no evidence for any connection between inflation and the level of productivity we do find a strong connection between inflation and productivity growth but it is so internally inconsistent as to be incredible the best explanation is that it is accounted for entirely by statistical bias from attempting to cointegrate stationary and non stationary variables

efficiency and equalization payments in a federal system of government a synthesis and extensions of recent results this paper investigates the rationale for a system of equalization transfers in a federal system of government the existing sources of inefficiency of resource allocation in economies with more than one level of government are synthesized in the framework of a simple decentralized multiprovince model with mobile factors of production the sources of inefficiency arise first because migrants respond at the margin to incorrect signals owing to the phenomena of rent sharing and fiscal exterality and second because of global rather than local inefficiencies the model is then extended to consider the role of the federal government in providing intergovernmental transfers in the face of such inefficiencies in addition to synthesizing the sources of inefficiency in federal models the equity arguments for equalization are briefly recounted efficacite et paiements de perequation dans un systeme federal de gouvernement synthese et extensions de certains resultats recents ce memoire examine la logique qui soustend un systeme de paiements de perequation dans un systeme fdderal de gouverement les auteurs utilisent un modele simple d un systeme multi provincial decentralise avec des facteurs de production mobiles pour definir les sources d inefficacite dans l allocation des ressources dans les dconomies qui possedent plus d un niveau de gouvernement ces inefficacites proviennent de ce que d abord ceux qui se deplacent le font en reponse a la marge a des signaux incorrects engendres par le partage de la rente sur la base de la residence et par les phenomenes d exteralites fiscales elles sont aussi le resultat d inefficacites globales plutot que locales dans le cadre de ce modele les auteurs analysent le role du gouvernement federal effectuant des transferts inter gouverementaux pour corriger ces inefficacites en plus de presenter une synthese des sources d inefficacite dans les regimes federaux les auteurs font un bref rappel en passant a l ensemble des arguments fondes sur l equite qu on utilise pour rationaliser les paiements de perequation this paper is a linear combination of two papers presented at the may 1982 meetings of the canadian economics association in halifax entitled the case for equalization payments by the authors and recent developments in the theory of regional economic policy in canada by boadway the authors are grateful for comments by the discussants jim johnson and baxter macdonald and by jack mintz brian scarfe gerard belanger david sewell tom courchene and the referees we are especially heavily indebted to dan usher for many stimulating comments and suggestions while the work was in progress some of the above persons will undoubtedly disagree with the emphasis we have chosen to put on various aspects of the analysis for policy purposes support for some of this work has been provided by the economic council of canada and is gratefully acknowledged canadian journal of economics revue canadienne d economique xv no 4 november novembre 1982 printed in canada imprimd au canada 0008 4085 82 0000 0613 01 50 1982 canadian economics association this content downloaded from 207 46 13 127 on wed 12 oct 2016 04 27 47 utc all use subject to http about jstor org terms 614 robin boadway and frank flatters

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

the tale of the tails canadian income inequality in the 1980s and 1990s we present new evidence on levels and trends in after tax income inequality in canada between 1980 and 2000 we argue that existing data sources may miss changes in the tails of the income distribution and that many of the changes in the income distribution have been in the tails for this reason we turn to an alternative source in particular we construct data on after tax and transfer income using census files augmented with predicted taxes based on information available from administrative tax data using these data we find that canadian after tax inequality levels are substantially higher than has been previously recognized primarily because income levels are lower at the bottom of the distribution than in commonly used survey data we also find larger long term increases in after tax income inequality and far more variability over the economic cycle this raises interesting questions about the role of the tax and transfer system in mitigating both trends and fluctuations in market income inequality les auteurs presentent de nouveaux resultats sur les niveaux et tendances de l inegalite des revenus apres impots au canada entre 1980 et 2000 on suggere que les donnees existantes peuvent avoir ignore des changements dans les extremites de cette distribution alors que le gros des changements y etait concentre pour cette raison les auteurs se sont tournes vers une autre source de donnees ils ont construit une base de donnees sur les revenus apres impots et les paiements de transfert en utilisant les donnees du recensement ainsi que des donnees additionnelles sur les impots prevus a partir de renseignements disponibles dans les dossiers administratifs on decouvre que les niveaux d inegalite des revenus apres impots sont beaucoup plus eleves que ce qu on a suggere jusqu ici d abord parce que les niveaux de revenus sont plus bas au pied de la distribution que ne le suggerent les donnees d enquetes on decouvre aussi un accroissement plus grand a long terme de l inegalite des revenus apres impots et une plus grande variabilite au cours du cycle economique voila qui souleve des questions interessantes a propos du role de la fiscalite et du systeme de paiements de transfert dans la modulation de la tendance et des fluctuations dans l inegalite des revenus du marche

applied general equilibrium models of taxation and international trade an introduction and survey we wish to acknowledge the help of three referees and of john pencavel on several earlier drafts as well as the assistance of the modelers whose work is referred to in the paper they corrected our lack of understanding of their work and provided many other helpful comments excellent research and bibliographical assistance have been provided by debbie fretz radwan shaban and janet stotsky helpful comments have been made by charles ballard michael boskin lans bovenberg sylvester damus harvey galper glenn harrison gordon lenjosek jack mutti serena ng t n srinivasan charles stuart and eric toder the authors also acknowledgefinancial support from the national bureau of economic research the national science foundation international business machines and the social sciences and humanities research council ottawa canada

the evolution of high incomes in northern america lessons from canadian evidence this paper uses tax statistics to construct new series on canadian top income shares from 1920 to 2000 and provides a systematic comparison with the u s experience as in the united states top income shares in canada display a ushaped pattern over the century with a precipitous drop during world war ii followed by a slower decline until 1970 since the late 1970s top income shares have been increasing dramatically and the very top shares are now as high as in the pre war era as in the united states the recent increase in top income shares is the consequence of a surge in top wages and salaries the canadian experience since the late 1970s does not appear to be well explained by tax changes suggesting that the upward trend in canada derives from the united states perhaps because many high income canadians have an emigration option this in turn suggests that the recent increase in u s personal income top shares is not merely a change in tax reporting behavior the recent sharp increase in top income shares in canada is of the same magnitude at the individual and family level and is not due to an increase in income mobility

inflation and social consensus in the seventies it is widely believed that the two oil price shocks of the i 970s played a major role in the increase in inflation in industrial countries while this hypothesis is consistent with the timing of changes in inflation at the global level it seems to break down when applied to individual countries cross sectionally for example over the period i973 9 switzerland had an average inflation rate of 4 7 while in neighbouring italy inflation averaged i5 6 over the same period furthermore inflation in the pre opec period i97i 2 was actually higher in switzerland than in italy it seems that a supply shock explanation of inflation in the seventies also requires an explanation of why different countries responded so differently to a similar set of shocks at the world level the purpose of this paper is to offer such an explanation and to test the hypothesis with a cross sectional equation accounting for differences in average inflation rates over the period i973 9 in eighteen oecd countries this time period includes the year of the first opec shock i 973 and the following six years up to the time of the second opec shock the hypothesis to be tested is set in the framework of a model similar to that of brunner et al i 980 the key features of the brunner model are that the adjustment of real wage expectations is subject to lags and that labour supply is positively related to the difference between the perceived real wage and the expected or target real wage given these two assumptions a negative supply shock gives rise to a period of stagflation whose intensity will be greater the slower is the speed of adjustment of real wage expectations the model of this paper extends the brunner model in three ways first across countries the speed of adjustment of real wage expectations or targets is assumed to depend positively on the degree of social consensus as proxied negatively by an indicator of average long run strike activity second the model allows for the possibility of inflation inertia or systematically incorrect inflation expectations as well as a sluggish adjustment of real wage expectations third the model incorporates the hypothesis that money supply growth will vary across countries according to variations in inflationary pressures as perceived by governments the first section of the paper provides a discussion of the rationale for the key proposition regarding strikes and social consensus as well as a brief discussion of the role of wage bargaining institutions section ii develops a theoretical model which yields a reduced form cross sectional equation relating the average i 973 9

public policy and saving in the united states and canada canadians have largely unrestricted access to tax preferred saving through the registered retirement saving plan rrsp programs no comparable program exists in the united states previous research has noted that household saving in canada grew relative to saving in the united states after the rrsp program was initiated suggesting that a program like the rrsp can increase saving this paper shows that the difference in household saving in the united states and in canada is more plausibly characterized as a simple life cycle response to differences in the overall intertemporal income reallocation built into tax and public pension systems rather than as a response to rrsp availability

the lucas critique and the volcker deflation this paper examines in light of the lucas critique the behavior of the phillips curve and of the term structure of interest rates after october 1979 it starts with an informal account of the policy change and then discusses how we might expect these two relations to shift after such a change it finds little evidence of a direct effect of the policy change on the phillips curve at least until 1982 it finds substantial evidence of a direct effect on term structure this abstract was borrowed from another version of this item

from theory to practice canadian economists contributions to public finance we survey canadian economists contributions to the field of public finance from the mid 1980s to 2016 we highlight the development and extension of the models and tools of public economics and the empirical studies that have deepened our understanding of the efficiency and distributional issues over a wide range of public finance issues we also highlight contributions to the development of policies through commissioned reports and the important role that canadian institutions the canadian tax foundation the think tanks and the federal and provincial departments of finance have played in shaping tax and fiscal policies de la theorie a la pratique contributions des economistes canadiens a la finance publique on examine les contributions des economistes canadiens au domaine de la finance publique du milieu des annees 1980 a 2016 on souligne le developpement et l extension des modeles et des outils d economie publique et les etudes empiriques qui ont aide a approfondir notre comprehension des enjeux d efficacite et de distribution dans un vaste eventail de questions de finance publique on souligne aussi les contributions des rapports commandites au developpement de politiques publiques ainsi que le role important d institutions canadiennes l association canadienne d etudes fiscales les groupes d experts ainsi que les ministeres des finances du gouvernement federal et des gouvernements provinciaux dans le design des politiques fiscales

a theory of interregional tax competition a general equilibrium model is constructed to study tax competition where local governments compete for capital by holding down property tax rates and public expenditure levels an exact definition of tax competition is provided and both the existence and nonexistence of tax competition are shown to be theoretically possible it is argued however that tax competition must occur under empirically reasonable conditions inefficiency in public production is also explicitly modeled the amount of capital used to produce a given level of public service output is shown to be greater than that which is required to minimize costs evaluated at the prices facing private firms

how do retirement tests affect the labour supply of older men abstract we analyze the sequential elimination of retirement earnings tests from canada s public pension plans our empirical framework potentially overcomes the obstacles encountered analyzing the tests within the context of a national social security system our results indicate that the removal of the tests were associated with relatively large shifts from part year full time to full year full time work we are unable to reconcile these results within the context of a traditional labour supply model instead they are consistent with a model which incorporates fixed costs of work or labour market rigidities which preclude continuous reductions in labour supply around retirement

a study of the impact of sectoral shifts on aggregate unemployment in canada the recent trend in macro economic literature has been to explain cycles in aggregate output and employment in terms of unexpected nominal shocks only in these models the natural rate of unemployment is constant this paper diverges from this approach and following a recent paper by david lilien 1982 considers the impact of real as well as nominal variables the main findings are 1 a significant part of the fluctuations in the canadian unemployment over the 1957 83 period was caused by real shocks to the economy and 2 most of the transmission of the business cycle from the united states to canada is effected through real variables as well une etude de limpact de deplacements sectoriels sur le niveau de ch6mage agrege au canada dans la litterature macroeconomique recente on a eu tendance a expliquer les cycles dans le niveau de la production et de l emploi a peu pres strictement en termes de chocs nominaux non anticipes dans ces modeles le taux de ch6mage naturel est constant ce memoire prend des distances par rapport a cette approche et suit pluto t la direction suggeree par un memoire recent de david lilien qui considere l impact des variables reelles tout autant que celui des variables nominales les resultats principaux sont 1 une portion significative des fluctuations dans le niveau du chomage canadien entre 1957 et 1983 a et causee par des chocs reels subis par l economie 2 le gros de h1 transmission du cycle economique des etats unis vers le canada se fait par le truchement des variables reelles

public goods self selection and optimal income taxation using the self selection approach to tax analysis this paper derives a modified samuelson rule for the provision of public goods when the government deploys an optimal nonlinear income tax this approach gives a straightforward interpretation of the central result in this area generalises it and provides a simple characterisation of optimal policy in a wide range of circumstances the analysis also emphasises and clarifies the significance of the choice of numeraire for the optimality of decentralising public spending decisions it is well known that the famous samuelson rule for the provision of public goods may not be applicable when the tax revenues used to finance the public goods come from distorting taxes the principle was recognized as long ago as pigou 1947 long before the samuelson rule was devised pigou saw that in addition to the resource cost involved in transferring funds from the private to the public sector there was a deadweight loss involved from this insight he suggested that the criterion for providing public goods should be more stringent than the samuelson rule would later suggest in particular one might expect that the inclusion of the deadweight loss of taxes as part of the cost of providing a public good would lead to a reduction in its optimal provision relative to a situation in which lump sum taxes were available the problem was investigated more systematically by atkinson and stern 1974 who considered the case in which a public good is financed by a set of optimal commodity taxes all individuals were assumed to be identical so efficiency alone dictated the objective they found that no prima facie case could be made for the pigou position that the use of distortionary taxes called for a reduction in the supply of the public good their analysis clearly showed that there were two influences at work when the financing of a public good was by distorting taxes on the one hand

unemployment hysteresis in canada an approach based on long memory time series models long memory univariate time series models known as arfima are applied to measure shock persistence for canada and the usa both output and unemployment exhibit higher persistence in canada than in the usa the finding that the rate of unemployment in canada exhibits high shock persistence supports the notion of hysteresis in unemployment the analysis of disaggregated canadian unemployment rates indicates that hysteresis is most pronounced for adult male workers the same class of models is used to obtain a generalization of the beveridge nelson decomposition of time series into a permanent and a cyclical component the permanent component of the canadian unemployment rate exhibits a kink in the early 1970s

why are prices sticky preliminary results from an interview study this paper reports preliminary results from a large research project on business pricing which is currently underway the idea is to use interviews with actual price setters to assess the validity of a dozen theories of price stickiness the rather unorthodox for economists methodology is defended the research design is described briefly and a few results based on the first 72 interviews out of a projected 200 are presented this sample suggests that the median firm changes its price annually and that price adjustments typically lag 3 4 months behind shocks to demand or cost this abstract was borrowed from another version of this item

optimal linear income taxation in models with occupational choice the purpose of this paper is to investigate the implication of occupational choice for linear income taxation occupational choice is restricted to entrepreneurship versus wage earning different settings are considered concerning the introduction of uncertainty and that of individuals heterogeneity in ability or risk aversion for each setting an optimal tax formula is derived and shown to be made up of various components pertaining to insurance redistribution and efficiency

public input competition abstract public investment in infrastructure may help create agglomeration economies by attracting mobile factors such as skilled labour competition among regions in public investment can then be destructive this paper analyzes the nash equilibria to a simple model of public input competition even though the regions are assumed identical the equilibrium may not be symmetric the problem with non cooperative behaviour is not only that regions invest too much but that too many regions may choose to invest depending on the parameter values the nash equilibrium may be efficient may be inefficient or may not exist at least not in pure strategies better mobility among regions leads to more aggressive competition the analysis suggests that rents from public investment may be dissipated by governments competition to attract mobile factors

sectoral shifts and cyclical unemployment a substantial fraction of cyclical unemployment is better characterized as fluctuations of the frictional or natural rate than as deviations from some relatively stable natural rate shifts of employment demand between sectors of the economy necessitate continuous labor reallocation since it takes time for workers to find new jobs some unemployment is unavoidable this paper presents evidence that most of the unemployment fluctuations of the seventies unlike those in the sixties were induced by unusual structural shifts within the u s economy simple time series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market these models are estimated and a derived natural rate series is constructed

the persistence of unemployment how important were regional extended unemployment insurance benefits this paper assesses the contribution of regionally extended unemployment insurance benefits to the persistence of the canadian unemployment rate during the 1980s we use administrative data associated with the operation of the ui program to produce counts of the number of ui claimants by benefit phase the data suggest that the change in the number of unemployed individuals above the level prevailing in 1981 is much larger than the change in the number of regionally extended benefit recipients we also examine the time series properties of the number of ui claimants by benefit phase and find that the number of regionally extended recipients is not unusually persistent indeed this series displays less persistence than the number of claimants in other benefit phases we recognize that the increase in potential benefit duration caused by regionally extended benefits may lengthen the time claimants spend in the initial and labour force extended benefit phases but we conclude that this indirect channel would have to be particularly strong to prevent one from concluding that the number of regionally extended benefit recipients was of relatively little importance in explaining the increased level and persistence of the canadian unemployment rate during the 1980s la persistance du chomage est ce que les prestations d assurance chomage pendant de plus longues periodes dans certaines re gions ai haut taux de ch6mage sont un facteur important ce m6moire 6value l importance de la politique de p6riodes allong6es de prestations d assurance ch6mage pour tenir compte de la conjoncture r6gionale sur la persistance du taux de ch6mage canadien dans les ann6es 80 les auteurs utilisent les donn6es administratives du programme d assurance ch6mage pour d6velopper des mesures du nombre de b6neficiaires selon la phase de prestation il semble que l augmentation du nombre des ch6meurs au dessus du niveau de 1981 est beaucoup plus grande que 1 augmentation dans le nombre des r6cipiendaires des prestations dites regionales les auteurs examinent aussi les propri6tes de la s6rie chronologique des r6cipiendaires de prestations d assurance ch6mage an earlier version of this paper was presented to the 1993 meetings of the canadian economics association we would like to thank pierre fortin craig riddell paul storer and two anonymous referees for useful comments although this work was supported by the business and labour market analysis group of statistics canada and the sshrcc it remains the sole responsibility of the authors canadian journal of economics revue canadienne d economique xxviii no 3 august aout 1995 printed in canada imprim6 au canada 0008 4085 95 555 67 1 50 canadian economics association this content downloaded from 207 46 13 176 on mon 20 jun 2016 05 30 32 utc all use subject to http about jstor org terms 556 miles corak and stephen r g jones selon la phase de prestation et constatent que le nombre des recipiendaires de ces prestations r6gionales n est pas persistant en fait cette s6rie chronologique montre moins de persistance que le nombre des ben6ficiaires dans les autres phases on reconnait que l accroissement dans la duree potentielle des prestations attribuable a la politique regionalisee peut accroitre le temps que les beneficiaires passent dans la phase initiale et la phase ult6rieure arrim6e a la conjoncture r6gionale mais les auteurs concluent que cet effet indirect devrait 6tre particulierement fort pour qu on ne soit pas amen6 a conclure que le nombre des b6neficiaires qui reqoivent des prestations pendant une periode plus longue n a eu qu une importance relativement faible dans l explication du niveau plus eleve et de la persistance du taux de chomage canadien dans les annees 80

the determinants of municipal tax rates in british columbia in this paper we study the regional pattern of municipal business property tax rates in the province of british columbia reduced form tax setting equations produce some evidence that municipal governments respond to tax changes in neighbouring jurisdictions a joint investigation of the determinants of tax base and municipal taxation decisions however reveals that it is difficult to interpret this response as arising primarily out of competition over tax base there is also some evidence that municipal tax rates are sensitive to taxes set on the same base by super municipal bodies jel classification c33 h71 les determinants des taux d imposition municipale en colombie britannique dans ce memoire les auteurs etudient le pattern regional des taux d imposition municipale sur la propriete fonciere commerciale dans la province de la colombie britannique on montre a l aide d un modele en forme reduite d equations de definition des taux d imposition que les gouvernements municipaux reagissent aux changements dans les taux d imposition dans leur voisinage cependant un examen conjoint des determinants de la base d imposition et des decisions municipales montre qu il est difficile d interpreter cette reaction comme emanant d une concurrence fiscale on montre aussi que les taux d imposition municipale sont sensibles aux niveaux de fiscalite imposes sur la meme base par les autorites supra municipales

top income shares in canada recent trends and policy implications according to canadian taxfiler data over the last thirty years there has been a surge in the income shares of the top 1 top 0 1 and top 0 01 of income recipients even with longitudinal smoothing by individual using three or five year moving averages top shares fell in 2008 and 2009 but only by a fraction of the overall surge alberta british columbia and ontario have much more pronounced surges than other provinces part of the canadian surge is likely attributable to u s factors but a comprehensive explanation remains elusive even so i draw implications for policies that might achieve some support from across the political spectrum including the elimination of tax preferences that favour those with high incomes the promotion of shareholder democracy and to maintain canada s relatively high intergenerational mobility continued wide accessibility to healthcare and education

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

narrative and var approaches to monetary policy common identification problems abstract romer and romer romer c d romer d h 1989 does monetary policy matter a new test in the spirit of friedman and schwartz in blanchard o j fischer s eds nber macroeconomics annual 1989 mit press cambridge ma pp 121 170 romer c d romer d h 1994 monetary policy matters journal of monetary economics 34 75 88 adopted a narrative approach to address the identification problems in time series models of monetary policy based on federal reserve documents the romers created a dummy variable equal to one in periods when the federal reserve contracted in response to perceived inflationary pressures this paper shows 1 the dummy variable is predictable from past macroeconomic variables reflecting the endogenous response of policy to the economy 2 unpredictable changes in the dummy do not generate dynamic responses that look like the effects of monetary policy the identification problems that plague time series models also afflict the narrative approach

the effect of marginal tax rates on taxable income a panel study of the 1988 tax flattening in canada abstract federal tax reform in 1988 flattened the canadian personal income tax schedule changing the marginal tax rates for many individuals using methods similar to those applied by auten and carroll rev econ 81 4 1999 681 in the study of the effects of the 1986 u s tax reform act we estimate the responsiveness of income to changes in taxes to be substantially smaller in canada however we find evidence of a much higher response in self employment income in the labor income of seniors and from those with high incomes

an empirical study of matching grants the cap on cap abstract funding mechanisms for social expenditures are currently being reformed in many countries while the theoretical implications of these changes are often easily identified their empirical magnitude is not always as clear for example in federal systems social expenditure is often funded by matching grants and estimates of the effect of varying matching rates on expenditures by sub national governments vary widely the ambiguity is due in part to inherent difficulties identifying price and income effects of federal grants given the structure of the funding mechanisms in most countries in this paper we examine a recent reform in canada in which federal grants for welfare expenditures were capped converted from an open ended to a closed ended matching grant importantly the cap applied to only three of 10 provincial governments our empirical strategy exploits the time series cross section variation in the funding mechanism provided by the differential application of the reform this approach potentially surmounts some of the difficulties which have beset earlier studies we find that the affected provinces did respond to the reform by reducing the growth rate of expenditures it was 8 to 9 percentage points lower than predicted in the absence of the cap over the medium term

a reduced form optimal nonlinear income tax problem abstract for a finite population with quasilinear preferences it is shown how mirrlees optimal nonlinear income tax problem can be simplified to a reduced form problem involving only the allocation of the consumption good this result is a finite version of a proposition established in the continuum by s lollivier and j c rochet

debt and tariffs an empirical investigation of the evolution of revenue systems abstract this paper presents a theoretical framework where government chooses fiscal structure so as to maximize political support and where the evolution of fiscal systems is determined by changing economic political and administrative factors estimating equations are derived and the model is used to explain the development of revenue structure in canada from 1871 to 1913 a period when major revenue sources consisted of the tariff debt and excises the empirical analysis distinguishes between government plans and ex post observations of public revenues and places particular emphasis on the derivation of hypotheses linking economic political and administrative variables to revenue structure

vertical fiscal externalities in a federation abstract we examine vertical fiscal externalities in a model where a state government provides a productivity enhancing public input and both the state and the central government tax wages and profits previous literature has emphasized the negative tax externality that occurs when two levels of government impose distortionary taxes on the same tax base we show that an increase in the state government s tax rate on wage income can increase federal revenues if the federal government imposes an ad valorem tax on employees wages and the demand for labour is inelastic we also show that an increase in the provision of the public input can either increase or reduce federal tax revenues leading to either under or over provision of the public input by the state government

economic and political foundations of tax structure this paper derives the essential elements of tax systems as the outcome of rational behavior in a model w here government maximizes expected support and where opposition to ta xation depends on the loss in full income the analysis treats the le vel of expenditures as endogenous and integrates the influence of adm inistration costs with that of political and economic factors tax st ructure is shown to be a system of related components in equilibrium a final section compares results to two alternative approaches opti mal taxation and the leviathan model copyright 1988 by american economic association

searching for a will o the wisp an empirical study of the nairu in canada abstract this paper demonstrates the uncertainty surrounding estimates of the non accelerating inflation rate of unemployment nairu a reduced form phillips curve is used to develop a generic model of the nairu which nests competing hypotheses about the specific form of the inflation unemployment relationship empirical results for the canadian economy show that the range of prime age male nairu s generated by statistically satisfactory and economically reasonable estimating equations covers almost the entire range of canadian post war prime age male unemployment experience estimates of the nairu depend heavily on the form of the estimating equation the operational definition of key variables and the data sample period

early retirement provisions and the labor force behavior of older men evidence from canada we examine the sequential introduction of early retirement provisions to canada s two public pension plans these reforms provide a unique opportunity to assess the effect of public pension plan parameters on labor supply behavior free of the biases that potentially affect the simple time series or cross section inference presented in many previous studies we find that the reforms led to an increase in pension receipt but had little immediate effect on labor market behavior this is due to the fact that men who initially took advantage of the early retirement provisions would otherwise have had limited labor market participation

unemployment insurance and unemployment dynamics one of the puzzling features of the recent behavior of the canadian unemployment rate is its persistence in the presence of a sustained expansion in real national income neither deficient aggregate demand nor a once for all supply side induced increase in the natural rate provides a convincing explanation of this phenomenon this paper presents a model that explains how aspects of unemployment insurance in canada will cause persistence unemployment will be highly serially correlated even if output is not the authors document the increased persistence of the unemployment rate since 1977 and show that the model accounts for much of this phenomenon

real business cycles a new keynesian perspective the debate over the source and propagation of economic fluctuations rages as fiercely today as it did 50 years ago in the aftermath of keynes s the general theory and in the midst of the great depression today as then there are two schools of thought the classical school emphasizes the optimization of private economic actors the adjustment of relative prices to equate supply and demand and the efficiency of unfettered markets the keynesian school believes that understanding economic fluctuations requires not just studying the intricacies of general equilibrium but also appreciating the possibility of market failure on a grand scale

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

taxation and deadweight loss in a system of intergovernmental transfers intergovernmental transfer programs in many federal systems including canada attempt to equalize differences in subnational jurisdictions tax capacities on the basis of the so called representative tax system rts it is shown that rts equalization grants effectively compensate subnational governments for a portion of the deadweight loss associated with taxes and consequently the grants may tend to increase the distortionary tax rates chosen by subnational governments this may be the case even when equalization is confined to tax bases that themselves are nondistortionary such as the taxation of pure economic rents

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

limited rationality and strategic complements the implications for macroeconomics this paper considers the implications of heterogeneity in information processing abilities for macroeconomic models that exhibit strategic complements the latter is the same concept that has received much attention in the recent macro literature under the headings keynesian coordination problems and positive trading externalities we consider environments in which agents vary in terms of their ability to form expectations and ask whether it is the sophisticated agents or the naive agents who have a disproportionately large effect on macroeconomic equilibrium we find that if macroeconomic interaction exhibits strategic complementarity then it is the naive agents who have a disproportionate impact

rationality of self and others in an economic system in this paper i want to disentangle some of the senses in which the hypothesis of rationality is used in economic theory in particular i want to stress that rationality is not a property of the individual alone although it is usually presented that way rather it gathers not only its force but also its very meaning from the social context in which it is embedded it is most plausible under very ideal conditions when these conditions cease to hold the rationality assumptions become strained and possibly even self contradictory they certainly imply an ability at information processing and calculation that is far beyond the feasible and that cannot well be justified as the result of learning and adaptation let me dismiss a point of view that is perhaps not always articulated but seems implicit in many writings it seems to be asserted that a theory of the economy must be based on rationality as a matter of principle otherwise there can be no theory this position has even been maintained by some who accept that economic behavior is not completely rational john stuart mill 1909 bk 2 ch 4 argued that custom not competition governs much of the economic world but he adds that the only possible theory is that standard economic doctrine makes assumptions of rationality that have very strong implications for the complexity of individuals decision processes the most complete assumptions of competitive general equilibrium theory require that all future and contingent prices exist and be known in fact of course not all these markets exist the incompleteness of markets has several side consequences for rationality for one thing each decision maker has to have a model that predicts the future spot prices this is an informational burden of an entirely different magnitude than simply optimizing at known prices it involves all the complexity of rational analysis of data and contradicts the much praised informational economy of the price system it is also the case that equilibria become much less well defined similar problems occur with imperfect competition this research was supported by the office of naval research grant onr n00014 79 c 0685 at the center for research in organizational efficiency institute for mathematical studies in the social sciences stanford university stanford california

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

political parties and the supply side of the economy the provision of physical and human capital in advanced economies 1960 90 theory partisan tenure of government in contrast to institutionalist and structural approaches is used to explain the nature of governmental strategies to affect the supply side of the economy the provision of the input factors capital and labor hypotheses supply side economic strategies are a function of the party in office left wing governments spend heavily in physical and human capital formation to raise the productivity of factors and the competitiveness of the economy rightwing governments rely instead on private agents to maximize economic growth the organization of the domestic political economy and the international economy which place heavy limits on the capacity of parties to affect the conduct of macroeconomic policies hardly constrain the choice of supply side economic strategies methods regression analysis of data for levels of public spending on gross fixed capital formation and on education in oecd nations from 1960 to 1990 results supply side policies conform to partisan preferences throughout the period examined the institutional configuration of the economy affected policies jointly with government partisanship until the oil shock but not afterwards economic openness does not constrain the choice of supply side policies

marginal effective tax rates for capital in the canadian mining industry the authors model a firm that explores develops and extracts a depletable asset taking into account various features of canadian corporate and ontario and quebec mining tax law they derive the user cost of capital and effective tax rate for investments undertaken by a mining firm calculations based on 1985 tax law show that there is considerable dispersion in effective tax rates most being negative especially for processing assets the authors conclude that these taxes have been very poor collectors of mining rents compared to a neutral cash flow tax coauthors are neil bruce ken mckenzie and jack mintz

attachment to home and efficient purchases of population in a fiscal externality economy abstract this paper examines the efficiency properties of an economy characterized by strategically competing regions and individuals with varying degrees of attachment to home in an otherwise standard fiscal externality setting regional authorities may make interregional transfers in purchasing preferred populations however there is a range of distributions of resources over which neither region makes transfers nevertheless all equilibrium allocations resulting from the nash behavior of regional authorities including those that involve no transfers are efficient therefore in contrast to the standard conclusions of the fiscal externality literature there is no efficiency role for a central authority

fiscal capacity tax effort and optimal equalization grants in this paper we address the question how should the tax burden in a feder ation be distributed across the different jurisdictions so that the social cost of providing government services is minimized using optimal tax theory we derive formulas for the optimal equalization grants that equalize the social marginal cost of raising revenue across all provinces we show how the optimal equalization grants are related to a measure of tax effort based on the marginal cost of public funds and a measure of fiscal capacity that takes into account the elasticity of the tax base and its substitutability with other tax bases

rationality in psychology and economics the task i shall undertake here is to compare and contrast the concepts of rationality that are prevalent in psychology and economics respectively economics has almost uniformly treated human behavior as rational psychology on the other hand has always been concerned with both the irrational and the rational aspects of behavior in this paper irrationality will be mentioned only obliquely my concern is with rationality economics sometimes uses the term irrationality rather broadly e g becker 1962 and the term rationality correspondingly narrowly so as to exclude from the domain of the rational many phenomena that psychology would include in it for my purposes of comparison i will have to use the broader conception of psychology one point should be set immediately outside dispute everyone agrees that people have reasons for what they do they have motivations and they use reason well or badly to respond to these motivations and reach their goals even much or most of the behavior that is called abnormal involves the exercise of thought and reason freud was most insistent that there is method in madness that neuroses and psychoses were patients solutions not very satisfactory solutions in the long run for the problems that troubled them the assumption that actors maximize subjective expected utility economic rationality supplies only a small part of the premises in economic reasoning and that often not the essential part the remainder of the premises are auxiliary empirical assumptions about actors utilities beliefs expectations and the like making these assumptions correctly requires an empirically founded theory of choice that specifies what information decision makers use and how they actually process it this behavioral empirical base is largely lacking in contemporary economic analysis and supplying it is essential for enhancing the explanatory and predictive power of economics

taxation and top incomes in canada we estimate the elasticity of reported income with respect to tax rates for high earners using sub national variation across canadian provinces we argue this allows for better identification of tax elasticities than the existing literature we find that elasticities of reported income at the provincial level are large for incomes in the top 1 but small for lower earners there are strong indications that the response happens both through earned and capital income while our estimated elasticities are large changes in tax rates cannot explain much of the overall long run trend of higher income concentration in canada resume fiscalite et revenus les plus eleves au canada les auteurs evaluent l elasticite du revenu declare par rapport aux taux d imposition pour les revenus les plus eleves en utilisant les variations intra nationales a travers les provinces du canada ils suggerent que cela produit une meilleure identification des elasticites que ce que contient la litterature pour le moment on decouvre que les elasticites du revenu declare sont elevees pour les 1 au sommet mais faibles pour les revenus plus bas il appert fortement que la reponse se produit tant pour les revenus gagnes que pour les revenus d investissement meme si les elasticites mesurees sont elevees les changements dans les taux d imposition ne peuvent pas expliquer beaucoup de la tendance a long terme vers une plus forte concentration des hauts revenus au canada

real wages real interest rates and the phillips curve this article argues that any analysis of a phillips curve should include the real interest rate in addition to inflation and real wages as any changes in the interest rate changes the labour capital input mix in the production process leading to a change in the level of employment in the economy to justify this argument a phillips curve model is developed which includes the real interest rate in addition to inflation and real wages after the diagnosis of the time series properties of the data an error correction model is developed and estimated using a set of us annual data from 1948 to 1996 the estimated parameters of the model do suggest that one should really take into consideration of the real interest rate while analysing the phillips curve a non nested test f test also suggests that the phillips curve model with real interest rate as an additional variable performs better than the conventional method that does not include the real interest rate

lessons on monetary policy from the 1980s t he half decade running from mid 1982 to mid 1987 was a pretty good era for u s monetary policy as these things go a sharp easing of policy beginning some time around midyear 1982 helped set in motion a recovery from the most severe business downturn the united states had experienced since the 1930s a downturn that tight monetary policy earlier on had deliberately brought about in order to slow the alarming acceleration of prices the recovery that ensued developed into a sustained expansion that continued without interruption through the end of 1987 thereby setting a new record for the longest recorded business expansion in u s peacetime experience a fiscal policy based on unprecedentedly large and continually growing structural budget deficits was a major factor underlying this record length expansion but at least monetary policy did not stand in the way just as importantly the severe 1981 82 recession served its intended purpose of substantially restoring price stability and even after five years of expansion inflation remained modest by recent historical standards at least as judged by these outcomes for the standard objectives of macroeconomic policy u s monetary policy was a distinct success during these years economists hoping to say something useful about monetary policy have had a tougher time the quantitative relationships connecting income and price movements to the growth of familiar monetary aggregates including especially the m1 measure of the money stock that had been the chief focus of monetary policy during 1979 82 utterly fell apart during this period moreover the collapse of these long standing

understanding real business cycles he 1 960s were a time of great optimism for macroeconomists many economists viewed the business cycle as dead the keynesian model was the reigning paradigm and it provided all the necessary instructions for manipulating the levers of monetary and fiscal policy to control aggregate demand inflation occurred if aggregate demand was stimulated excessively and unemployment arose if demand was insufficient the only dilemma faced by policymakers was determining the most desirable location along this inflation unemployment tradeoff or phillips curve the remaining intellectual challenge was to establish coherent microeconomic foundations for the aggregate behavioral relations posited by the keynesian framework but this was broadly regarded as a detail that should not deter policymakers in their efforts to stabilize the economy the return of the business cycle in the 1970s after almost a decade of economic expansion and the accompanying high rates of inflation came as a rude awakening for many economists it became increasingly apparent that the basic keynesian framework was not the appropriate vehicle for understanding what happens during a business cycle nor did it seem capable of providing the empirically correct answers to questions involving changes in the economic environment or changes in monetary or fiscal policy the view that keynesian economics was an empirical success even if it lacked sound theoretical foundations could no longer be taken seriously the essential flaw in the keynesian interpretation of macroeconomic phenomenon was the absence of a consistent foundation based on the choice theoretic framework of microeconomics two important papers one by milton friedman 1968 and the other by robert lucas 1976 forcefully demonstrated examples of

tests of the rational expectations hypothesis this paper reviews evidence on the structure of anticipation from a number of empirical studies jack muth s rational expectations hypothesis is compared with a variety of alternative models including ferber s law the implicit expectations model of edwin mills and muth s new errors in the variables model the cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations this implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational instead it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated copyright 1986 by american economic association

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

on the consequences of government objectives for economies with mobile populations abstract we compare the efficiency and social welfare properties of equilibria resulting from different governmental objectives in a federal system with a mobile population the objectives considered are total utility average utility representative resident s utility and profit maximization the representative resident approach is unique in that it depends only on utility it yields the best efficient allocation from the perspective of a government s residents average utility yields an efficient allocation that non residents prefer both the profit maximizing and total utility approaches may lead to inefficient allocations we also show that the representative resident approach is socially preferred to a total utility approach