common trends the government s budget constraint and revenue smoothing abstract the requirement that the government s budget be balanced in present value terms is shown to be equivalent to the condition that government expenditures inclusive of interest tax receipts and seignorage be cointegrated the condition is in fact stronger requiring that the deficit inclusive of interest be stationary stationarity of the net of interest deficit is neither necessary nor sufficient for intertemporal budget balance however it does have implications for barro s tax smoothing hypothesis data for the period 1890 1986 are consistent with intertemporal budget balance but not with tax smoothing

the u s evidence on optimal taxation over time abstract this paper considers a tax rule in which a uniform tax rate over time becomes optimal its implications are that 1 changes in the tax rate should arise only when there are changes in permanent government expenditures and 2 no variable other than permanent government expenditures should be of any value in predicting the tax rate these implications are tested using u s data for 1937 82 empirical results of the tests reveal that in addition to responding to permanent government expenditures the tax rate also responds to temporary defense purchases the general price level and a time trend

assessing long term fiscal developments a new approach abstract we use a new approach to assess long term fiscal developments by analyzing the time varying behaviour of the two components of government spending and revenue responsiveness and persistence a feature not captured by automatic stabilisers we are able to infer about the sources of fiscal deterioration improvement drawing on quarterly data we estimate recursively these components within a system of government revenue and spending equations using a three stage least square method for eight european union countries plus the us the results suggest that significant changes in the fiscal stance including those related to the current crisis are reflected in the estimates of persistence and responsiveness

deficits government expenditures and tax smoothing in the united states 1929 1988 abstract barro s tax smoothing hypothesis tsh implies that the government runs a budget deficit whenever it anticipates the growth rate of national income to increase or the growth rate of its expenditure to decline we test this implication of the hypothesis by examining the implied cross equation restrictions on a vector autoregression var model using u s data for the period ranging from 1929 to 1988 our formal tests reject the hypothesis for the full sample period but cannot reject it for the post 1947 period further investigations show that the statistical rejection should be attributed to sharp differences in the statistical properties of the pre 1947 and the post 1947 data rather than the failure of the hypothesis itself

subjective performance and the value of blind evaluation we investigate the incentive and project screening effects of anonymity in a setting of subjective performance evaluation if the review process is blind then the applicant s payoff relevant type is hidden from the reviewer if the process is nonblind or informed then the reviewer observes the applicant s type directly in either case the evaluator receives a noisy signal on the quality of the agent s project and decides whether to accept or reject it we find that if the signal is not verifiable then informed evaluation results in an excessively steep equilibrium acceptance policy the standard applied to low ability applicants is too stringent and the standard applied to high ability applicants is too lenient blind review in which all applicants face the same standard often provides better incentives but it discards valuable information for screening projects we discover that blind review is more likely to be preferred by the evaluator when 1 the applicant pool is skewed toward high ability types 2 the stakes from acceptance are relatively high for applicants 3 both types of errors are relatively less costly or 4 there is little competition among reviewers we also discover that under blind review the evaluator may benefit from a more diverse applicant pool

testing the positive theory of government finance researchers characterizing optimal tax policies for dynamic economies have reasoned that tax rates should follow a random walk we conduct a frequency domain examination of u s tax rates and reject the hypothesis that the first difference in the series is white noise the source of the rejection is pronounced activity of tax changes at an eight year cycle regression analysis confirms the finding that there is a cyclical component to tax changes corresponding to changes in political party administration the results suggest that the positive theory of government finance needs to be refined to incorporate features of political equilibrium

verifying the solution from a nonlinear solver a case study we are pleased to confirm that any doubt our article mccullough and vinod 2003 hereafter mv03 may have cast on ron shachar and barry nalebuff 1999 hereafter sn99 must be removed we are especially pleased because we thought it quite unfair that other researchers were able to exempt themselves from such detailed scrutiny it appears that such researchers no longer will have the luxury of reneging on their agreement to honor the replication policy as this journal now requires authors of accepted empirical papers to provide all programs and data files for posting on the aer web site as a precondition of publication the primary aim of our article mv03 was to provide a four part methodology for verifying the solution from a nonlinear solver check the gradient examine the trace analyze the hessian and profile the likelihood we adduced copious evidence mv03 p 873 that solvers used by economists can produce inaccurate answers gave examples of different packages giving different answers to the same nonlinear problems mv03 p 874 and showed mv03 pp 873 74 at least in this journal that researchers make no effort to verify the solutions from the solvers that they use we believe this uncritical acceptance of solutions from nonlinear solvers to be a systemic problem in economic research that is why we wrote the article certainly econometrics texts do not show how to verify the solution from a nonlinear solver in passing we also showed how a problem can be too large for conventional pc methods and indicated the failure of replication policies in this journal and other journals we used the data and likelihood function from sn99 to illustrate the methodology in the course of this illustration we noted that the hessian was ill conditioned suggested that there might exist multiple optima and that inference based on the wald statistic was not appropriate we concluded that the solution we found was at best a tentative solution however as shown in shachar and nalebuff 2004 hereafter sn04 when the problem is rescaled the hessian is not ill conditioned they have correctly identified the difference between the condition number of the badly scaled version of the problem that we analyzed in mv03 and the well scaled problem that they have analyzed when the problem is correctly scaled the hessian is well conditioned the model is locally identifiable the problem can be solved on a pc a solution to the problem exists and sn present it in their table 1 though we were aware that rescaling could ameliorate ill conditioning mv03 p 882 we were unaware of the distinction between artificial ill conditioning and inherent ill conditioning so the method we suggested for analyzing the hessian contained an error of omission this error caused us to reach an incorrect conclusion concerning the existence of a solution to the problem we apologize to professors shachar and nalebuff and we thank them for their gracious understanding in this regard accordingly we have amended our prescription for analyzing the hessian see our nearby exchange with david m drukker and vince wiggins 2004 hereafter dw for complete details our

are bond financed deficits inflationary a ricardian analysis this paper considers the possible theoretical validity of the following monetarist hypothesis that a constant positive government budget deficit can be maintained permanently and without inflation if it is financed by the issue of bonds rather than money the question is studied in a discrete time perfect foresight version of the competitive equilibrium model of sidrauski modified by the inclusion of government bonds as a third asset it is shown that the monetarist hypothesis is invalid if the deficit is defined exclusive of interest payments but that it is valid under the conventional definition it is also shown that the stock of bonds can grow indefinitely at a rate in excess of the rate of output growth provided that the difference is less than the rate of time preference these formal conclusions do not take account of possible limitations on taxing capacity arising from default incentives that tend to grow with the stock of bonds

on the limitations of government borrowing a framework for empiricaltesting this paper seeks to distinguish empirically between two views on the limitations of government borrowing according to one view nothing precludes the government from running a permanent budget deficit paying interest due on the growing debt load simply by issuing new debt an alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms we show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals empirical tests which have been developed for this economic question lead us to conclude that postwar u s deficits are largely consistent with the proposition that the government budget must be balanced in present value terms this abstract was borrowed from another version of this item

are state and provincial governments tax smoothing evidence from panel data the theory of debt examined here is known variously as efficient taxation over time optimal taxation over time the equilibrium approach to fiscal policy or tax smoothing tax smoothing results when an efficient government fixes tax rates today to minimize the costs of taxation over time given the long run constraint of a balanced budget if the marginal costs of taxation are an increasing function of the amount of resources taxed i e the tax rate then minimization of the total costs of taxation implies that the planned tax rate will be constant over time tax rate changes will be unpredictable and the tax rate will behave as a random walk efficient governments will not adjust tax rates to accommodate temporary changes in expenditures and revenues instead governments will minimize tax rate changes by tax smoothing smoothing tax rates implies that temporary changes in government spending and output result in deficits and surpluses therefore tax smoothing provides a theory of government debt the model is primarily due to barro 1 the goal of this paper is to contribute to our understanding of government debt the focus of this paper is on state and provincial debt or what is generally referred to as state and local debt nearly every state government in the united states has a balanced budget rule however balanced budget rules are not sufficient to rule out tax smoothing as state governments could build up budget surpluses in good times to smooth budgets over the business cycle if state governments are smoothing tax rates then their budget surpluses are endogenous contrary to the state governments provincial governments in canada have no balanced budget rules if provincial governments are smoothing tax rates it could explain the behavior of their budget deficits and surpluses as shown by barro tax smoothing implies that the overall tax rate behaves as a random walk and the tax rate would be a nonstationary time series with a unit root this study examines the tax smoothing hypothesis in two ways first the random walk implication is examined directly by testing the null hypothesis that the tax rate time series has a unit root second if the tax rate behaves as a random walk then changes in the tax rate should be unpredictable from past information if past information can predict tax rate changes this would provide evidence in favor of an alternative hypothesis a rejection of tax smoothing suggests that state and provincial tax rates respond to current

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

a keynesian macro econometric model of the uk 1955 1984 summary in this paper we present a small keynesian macro economic model in which wage price determination is linked to the working of goods and money markets by explicitly treating the keynes effect we derive a general expression for the employment money supply elasticity and draw the is lm loci in the employment interest rate space our empirical specification allows for short run disequilibrium dynamic adjustments around the static long run relations predicted by the theoretical model by careful use of our specification search strategy we obtain a statistically sound econometric model which exhibits sensible long run properties a remarkable finding implied by our estimates is that equilibrium unemployment is negatively affected by both money supply and incomes policy

the determinants of the public debt in the united states 1953 1978 barro claims that since the public rationally forecasts and discounts future taxes government debt does not represent net wealth to the public and therefore does not affect any real economic variables then why are there ever deficits barro has presented a theory of optimal deficits based on intertemporal tax smoothing the theory predicts that nominal debt grows in proportion to anticipated inflation varies contracyclically with respect to real income cycles and varies procyclically with respect to war cycles barro tested his theory using annual american data for 1922 76 and found weak support for his theory this paper reexamines barro s tests using quarterly american data for 1953 q1 to 1978 q4 and finds stronger support for barro s theory than barro found using annual data this paper also concludes that state and local governments do not engage in tax smoothing behavior probably due to considerations of migration and that the debt held by the central bank should be included in the definition of public debt

wage inflation in the united kingdom in britain there is little agreement on what determines the growth of wages or indeed on whether a stable wage equation exists in this paper i try to clarify matters in two ways first i aim to represent the data generation process as faithfully and accurately as possible while using with a few modifications the criteria for model selection advanced in davidson et al 1978 second i use five different measures of the pressure of demand rather than just picking on one particular measure 2 it may be helpful at this stage to summarize very crudely the argument and results in section ii having first set out the framework for the rest of the analysis which relates to the period 1961 i 1980 iv i modify the standard real wage model by proxying the desired level of real wages by a moving average of the past level of real wages it is found that the coefficient on the prevailing real wage is equal but of opposite sign to that on the desired wage thus in the long run inflation is independent of the level of real wages the pressure of demand and incomes policy dummies are both found to be significant one would have expected that in the long run the rate of growth of earnings at given price inflation and pressure of demand would respond to differences in the rate of growth of productivity but over the sample period there was no evidence of this once we allowed for incomes policy which implies considerable rigidity in the target rate of growth of wages the analysis so far includes no specifically expectational variables in section iii i use some survey data on wage expectations which have the advantage of being based on quantitative responses one rationale for having wage expectations in a wage equation might be that in a world of staggered contracts where workers care about relative wages they will take into account what they expect to happen to the wages of other workers when settling now a two equation model for wages and wage expectations is presented in the subsequent section and in most respects the results confirm our conclusions from the previous sections however the preferred specification obtained here which encompasses much of the earlier work and probably constitutes progress is one that we have some doubts about and will it is hoped form the basis for future research in this area

international evidence of tax smoothing in a panel of industrial countries a panel of industrial countries is examined for evidence of tax smoothing tax smoothing results when governments minimize tax distortions over time the model provides a positive theory of government debt and is due primarily to barro unit root tests are performed in panel data to test the null hypothesis of nonstationary tax rates panel regressions are then undertaken to test the null hypothesis that tax rate changes are unpredictable and test for evidence of an alternative hypothesis political and economic variables are examined for their ability to predict tax rate changes overall the results cannot reject the null hypotheses and support tax smoothing by national governments

are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint abstract time series related to fiscal and external deficits are commonly subjected to stationarity and cointegration tests to assess if the deficits are sustainable such tests are incapable of rejecting sustainability the intertemporal budget constraint proves to be satisfied if either the debt series or the revenue and with interest spending series are integrated of arbitrarily high order i e stationary after differencing arbitrarily often revenues and spending do not have to be cointegrated rejections of low order difference stationarity and of cointegration are thus consistent with the intertemporal budget constraint error correction type policy reaction functions are suggested as more promising for understanding deficit problems

causes of the current stagflation since 1975 labour slack has been unusually high in the oecd countries and yet inflation has not diminished the less favourable mix of unemployment and rate of change of inflation which we call stagflation is explained by a fall in the feasible rate of growth of real wages unmatched by a reduction in the constant term in phillips curve to investigate this mechanism conventional wage and price equations are estimated for 19 countries and then used for simulation stagflation has been caused in roughly equal amounts by rising relative import prices and by the fall in the rate of productivity growth in the basic model the phillips curve is assumed not to adapt to falls in feasible real wage growth but in a final section an adaptive wage equation is estimated which confirms that the process of adaptation is slow

an investigation of ricardian equivalence in a common trends model abstract to empirically discriminate between ricardian and non ricardian behaviour we have to use a method that distinguishes between expected and unexpected as well as permanent and transitory changes in taxes and government consumption one method that provides these distinctions between different types of changes is the common trends framework used in this paper which is a var model with cointegrating constraints in the empirical study of us data there is some support for the ricardian hypothesis but there are also some deviations from its predictions however the differences do not lend support to a keynesian view of budget deficits but rather to the view of expansionary fiscal contractions this can be motivated theoretically by uncertainty about future taxes in combination with prudent households

replication in empirical economics the journal of money credit and banking project this paper examines the role of replication in empirical economic research it presents the findings of a two year study that collected programs and data from authors and attempted to replicate their published results the research provides new and important information about the extent and causes of failures to replicate published results in economics the findings suggest that inadvertent errors in published empirical articles are a commonplace rather than a rare occurence copyright 1986 by american economic association

u s states the medicaid program and tax smoothing this paper tests the tax smoothing theory by focusing on its implication that a change in permanent government spending should result in an equal sized change in the tax rate the effect of medicaid a state administered federal and state funded medical insurance program for the poor on state tax rates is investigated the medicaid program provides a natural experiment for this test as states are required to cover certain groups in order to receive federal matching money additionally during the 1980s a series of federal mandates greatly increased state medicaid expenditures two stage least squares is used on a panel of u s states 1978 1994 to test whether changes in permanent state medicaid expenditures resulted in equal sized tax rate changes tax smoothing as a positive theory of state government behavior is rejected additionally it is found that this rejection cannot be attributed to the stringency of balanced budget rules