Level Of Real Output Research Articles

A SIMPLE GENERAL EQUILIBRIUM ANALYSIS OF THE RELATIONSHIP BETWEEN REAL TAX REVENUE and THE TAX RATE

Scottish Journal of Political EconomyVolume 36, Issue 4 p. 321-352 A SIMPLE GENERAL EQUILIBRIUM ANALYSIS OF THE RELATIONSHIP BETWEEN REAL TAX REVENUE and THE TAX RATE Bruce Bender, Bruce Bender University of Wisconsin-Milwaukee *The author thanks Leonardo Auemheimer, Satya Das, Bill Dougan, Dennis Fixler, Sol Shalit, and an anonymous referee for comments on previous drafts and Ron Penl for his able programming assistance in the simulation of the CES results of section IV.Search for more papers by this author Bruce Bender, Bruce Bender University of Wisconsin-Milwaukee *The author thanks Leonardo Auemheimer, Satya Das, Bill Dougan, Dennis Fixler, Sol Shalit, and an anonymous referee for comments on previous drafts and Ron Penl for his able programming assistance in the simulation of the CES results of section IV.Search for more papers by this author First published: November 1989 https://doi.org/10.1111/j.1467-9485.1989.tb01098.x AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Volume36, Issue4November 1989Pages 321-352 RelatedInformation

A Balanced-Budget Constraint in Modern Stochastic Macromodels

Currently (September 1985), a constitutional balanced-budget amendment is pending in the U.S. Senate. Thirty-two states have passed resolutions calling for a constitutional convention to enact such an amendment. In 1963 Senator Harry Byrd, Sr. asked Budget Director Kermit Gordon what balancing the budget would do for the country. Gordon replied that, probably would add about 2.5 million people to the rolls of the unemployed, delay the recovery about four years, and knock 10 percent off U.S. output [16, 284]. The Keynesian conventional wisdom of the 1960s was that fiscal and monetary policy should focus on the benefit-cost tradeoffs between inflation and unemployment (stabilization), along with tradeoffs implicit in resource allocation and the distribution of income. Given these objectives, there should be no independent consideration of the budget deficit of the federal government [24]. As Abba Lerner argued in his early statement of Keynesian principles of functional finance, the instruments to prevent unemployment and inflation are available until it is recognized that the size of the national debt is relatively unimportant [17, 302]. As outlined by Walter Heller [15] and others, the stabilization role of fiscal policy, together with monetary policy, in the 1960s was to provide the appropriate degree of stimulus or restraint to achieve a target level of real output. Since the mid-1960s such a role for fiscal policy has been challenged, first by the Friedman-Phelps [14; 27] accelerationist hypothesis and then by the Lucas-Sargent [19; 29] policy ineffectiveness proposition. The accelerationist or natural rate theory, especially as advanced by Milton Friedman, argues that stabilization policy should be geared toward rules and control of nominal variables such as the inflation rate. Friedman's analysis also implies the futility of using aggregate demand policy to achieve fixed output targets. Friedman's analysis suggests the possibility that with monetary policy geared to price stabilization and with sustainable real output gains not attainable via aggregate demand policy, fiscal policy instruments may be adjusted to achieve a balanced-budget without cost. Buchanan and Wagner [7] rely on Friedman's analysis to support their call for a constitutional balanced budget amendment.'

A Simple Model of Monetary Dynamics: Comment

This paper develops a dynamic model that integrates the Keynesian IS-LM model with the Friedman-Phelps natural rate hypothesis and the Cagan adaptive expectations model. Behavioral relationships in the economy are represented by a system of differential equations that determines the time response of endogenous variables to a change in the rate of monetary growth. In the short run, an increase in the rate of monetary expansion produces a decline in the interest rate and a higher level of real output. But, in the long run, there is no effect on real output, and both the rate of inflation and rate of interest increase by the amount of increase in the rate of monetary growth. Studying the dynamic properties of the system gives conclusions previously reached by Friedman. If the monetary authority chooses to control the nominal money supply or the inflation rate (the price level), the system is stable. If the monetary authority attempts to peg either real money balances, the real or nominal interest rate, or real income, the system is unstable. On the other hand, a desired long-run level for the nominal interest rate or for real money balances can be achieved indirectly by choosing the appropriate rate of inflation.

Prices, labour demand, and real output in the New Zealand economy: An econometric application

This paper presents the results of an investigation into one of the processes by which prices could have been set in New Zealand over about the last twenty years; it does not concern itself with any processes by which wages may have been determined, as the particular price process is for a representative firm which treats its wage rate as predetermined. The firm attempts to maximise its profits, and is able to choose simultaneously its product price, its demand for labour services, and the level of real output it wishes to produce.A structural model for this representative firm is developed within a static framework in Section one. In Section two are presented the results obtained from econometric estimation of a dynamic form of the model. Aggregate data have been used both for the ordinary least squares (OLS) estimates of each of the price, labour demand, and real output equations, and for the two stage least squares (2SLS) estimates of the simultaneous equation system. Principal conclusions from the research are summarised in Section three.

A Neo-Classical Approach to the Determination of Prices and Wages

In most macro-economic models of Canada, the United Kingdom and the United States, prices and wages are determined in a Phillips-curve framework. In the original formulation the rate of change of wages is dependent on the rate of unemployment only. In subsequent formulations effects of rate of change of consumer prices and of productivity have been brought in to explain the rate of change of wages. However, the main emphasis is still on the trade-off between inflation and unemployment. In this paper we argue that, while this approach may be reasonable for a short-term model, it is inappropriate for a longer-run analysis. We argue that this approach does not explain the trend rate of growth of wages (and prices), but only the movement around the trend, with reference to unemployment and such other factors. In the longerrun analysis the trend rate of growth is the important matter to explain, and this requires a reformulation of the prices and wages equations. An important piece of information we use for this reformulation is the fact that the wage share has been stable in a secular sense, and this implies that in the long run both price and productivity changes are passed on to wages.2 This leads us to a productivity theory of real wages which we find explains reasonably well the movements in wages in the post-war period in Canada. Since the real-wage equation implicitly assumes absence of illusion in the labour market, it determines only the ratio of money wages to prices and not their absolute levels. The latter has to be determined with reference to money supply, level of real output, and so on. Since these equations are based on classical economic theory and we draw inspiration from the work of such eminent neoclassicists as M. Friedman and D. Patinkin, we call our approach a neoclassical approach to prices and wages to be distinguished from the Phillips (or Keynesian) approach. As we note below, when viewed in the framework of long-run analysis, there is still some trade-off between unemployment and inflation, but the degree of trade-off is not quite so great as that obtained by traditional analysis. The main message

Simultaneous equation wage determination in New Zealand(1)

The wage determination hypotheses presented and tested in this paper were developed as two equations within a simultaneous equation model designed to explain and forecast for post-war New Zealand, the actual money wage rate, the minimum money wage rate, the retail price level, the demand for labour, the supply of labour, and the level of real output. The model is linear in the logarithms of the variables. Work on equations explaining the latter four variables is proceeding. In section two the hypotheses are formulated; in section three they are tested. Tests were conducted with both annual and semi-annual data, and for the annual data some two stage least squares (2SLS) estimates are presented and compared with the ordinary least squares (OLS) estimates.

FACTORS IN CANADA‐UNITED STATES REAL INCOME DIFFERENCES

This paper is a part of a larger study of economic growth in Canada, following the methods developed by Edward Denison in his book The Sources of Economic Growth in the United States and the publication Why Growth Rates Differ. The new material in this paper relates to Canada and the Canadian/U.S. comparison, while the material on Northwest Europe is drawn from the Brookings study.The present paper sets out the results to date on the differences in real output per employed person between Canada and the United States for one year, 1960. At this stage in our research the results indicate that the level of real output per employed person in Canada was about 20 per cent lower than in the United States in that year. On the basis of historical output data, it would appear that this margin of difference in Canadian/U.S. product levels has persisted throughout the present century.The central part of this paper examines the significance of differences in factor inputs in Canada and the United States and their contribution to the difference in income. The level of inputs per employed person in Canada accounts for only about 2 percentage points of the income difference between Canada and the United States. These results indicate that the overwhelming part of the difference in output per employed person between the two countries reflects the differences in output in relation to total factor inputs, rather than the magnitude of other factor inputs used in combination with labour.This result is consistent with earlier studies by Denison and others which have indicated the crucial importance of output in relation to total factor inputs, both in output growth over time and intercountry comparisons of output level.The body of the paper can give only brief attention to the numerous conceptual and statistical questions that arise in such a wide‐ranging study, and the authors do not pretend to have tackled, let alone resolved, all of the wide range of problems related to this study. Nor do they claim any high degree of precision for the results, especially in the light of the statistical limitations of the basic data.

Modigliani on the Interaction of Monetary and Real Phenomena

In an important recent article,' Modigliani has renewed his analysis of the relationship between the real and monetary parts of the Keynesian system. One of Modigliani's major points in his latest article is that his famous 1944 model 2 embodied an error, for, in his opinion, it incorrectly specified the forms of the real aggregate consumption and investment demand functions.3 While we find much to agree with in this new model, we do not agree with him as to the fundamental source of error in the 1944 model. Consequently, we are in disagreement with some important aspects of the latest formulation and, as a result, with some of his more important conclusions. basic flaw in Modigliani's 1944 model is not the fact that the aggregate real spending functions were not homogeneous of degree zero with respect to prices.4 A quite different source of error was involved, and this error has been partly perpetuated in the 1963 model. While Modigliani's 1944 system contains a direct relationship between the price level and the money-wage rate,5 this relationship is omitted entirely from the monetary subset of equations. It is this relationship, however, which provides an essential link between the monetary and real sectors. In 1944, Modigliani claimed that the four equations which defined . . the system of monetary equilibrium were completely independent of the other equations in the system and formed a determinate subset.6 Consequently, Modigliani concluded that Since the money income is determined exclusively by the monetary part of the system, the price level depends only on the amount of and therefore a change in the money-wage rate could affect the price level only if it resulted in a change in the level of output.7 This surprising result is not only in conflict with Keynes' analysis of the effects of money wage changes,8 but it is also incompatible with Modigliani's own conclusion in a later section of that same 1944 paper. Towards the end of his 1944 article, Modigliani argued that a reduction in the moneywage rate will . . depress the interest rate, the money income, and money wages without affecting the real variables of the system, employment, output, real wage rate. 9 But how then can a change in the money-wage rate affect the rate of interest? If the money-wage rate change does not affect real output, then, by Modigliani's earlier assertion, it cannot affect the price level. If both the price level and the level of real output are unaffected, there should be no change in the transactions demand for cash balances and consequently no change in the rate of interest! Of course, a change in the moneywage rate does affect prices and output and, therefore, the rate of interest. Accordingly, Modigliani's belief that the monetary subset is independent of the money-wage rate must be in error. In his latest formulation, Modigliani explicitly introduces the price level variable into his demand for money equation in order to demonstrate that, given nominal money balances, changes in the money-wage rate will shift the entire money market function relating the rate of interest and the level of output.10 This implies that contrary to the 1944 model, at any given level of output, a decrease in the money-wage rate involves a reduction in prices and money incomes and therefore a decrease in the demand for transactions balances. Modigliani can now demonstrate that the moneywage rate has an impact on the demand for money equation, but, in his system, a change in the money* authors are associate professor of economics at the University of Pennsylvania and Lilly Faculty Fellow, University of Chicago, respectively. 'F. Modigliani, The Monetary Mechanism and Its Interaction With Real Phenomena, Review of Economics and Statistics, xxxxv (Feb., 1963), 79-101. 2 F. Modigliani, Liquidity Preference and the Theory of Interest and Econometrica, xiI (Jan., 1944), 4588; reprinted in Readings in Monetary Theory (New York: Blakiston, 1951), 186-239. All references are to the Readings in Monetary Theory reprint. 'F. Modigliani, The Monetary Mechanism and Its Interaction With Real Phenomena, 82. 'In fact, we shall argue that the real aggregate consumption function is incorrectly specified in the 1963 model. 'F. Modigliani, Liquidity Preference and the Theory of Interest and 188, equation 7. Ibid., 190. 7Ibid., 210. 'J. M. Keynes, General Theory of Employment, Interest, and Money, (New York: Harcourt Brace, 1936), Chap. 19. 'F. Modigliani, Liquidity Preference and the Theory of Interest and 220. 0F. Modigliani, The Monetary Mechanism and Its Interaction with Real Phenomena, 89-90.