Knowledge that Transforms

The problem of optimal exchange intervention is approached using the techniques derived in the "targets, instruments, and indicators" literature. The optimal exchange-rate policy is one of permitting the appropriate degree of exchange-rate flexibility rather than one of complete fixity or complete flexibility of the exchange rate. Although the problem of the optimal exchange-rate regime has been analyzed in these terms before, criteria previously employed, emphasizing the geographical or functional location of disturbances, are seen to be inappropriate for a portfolio balance model with some degree of capital mobility.

[The paper begins with a critical examination of four mistaken propositions that characterize much of the conventional wisdom on capital income taxation. The analysis then shows the correct approach to evaluating the welfare cost of alternative tax treatments of capital income when taxes affect both the supply of labor and the timing of consumption.]

Estimates of a rational expectations version of Friedman's time-series consumption model are obtained by imposing the pertinent restrictions across the stochastic processes for consumption and income. A likelihood ratio test is used to test the adequacy of three joint hypotheses: namely, Friedman's model, rational expectations, and some arbitrary conditions on the disturbance process in the consumption function. The paper treats both the cases in which income is econometrically exogenous with respect to consumption and those in which it is not. The macroeconomics of this exogeneity condition are briefly discussed.

This paper derives an econometrically meaningful test of the Tiebout hypothesis and demonstrates that previous tests are inappropriate. The implications generated by two closely related models of voter-determined local fiscal variables and individual resident housing choices are compared. We demonstrate that when the Tiebout mechanism operates without interference, housing quantity and location choices are Pareto efficient, while they are not when frictions interfere with its operation. We show that the appropriate test requires joint estimation of a set of structural equations determining housing purchases and locational choices utilizing data for both median and nonmedian voters across metropolitan area jurisdictions.

The study analyzes the wage and price adjustment process in open economies in response to changes in exchange rates and import price. It distinguishes between the impact or cost-push effect, in which the system may exhibit temporary nonneutrality, and the lagged response of excess demand in labor and home-goods markets, which determines the stability of neutrality of long-run equilibria. An empirical illustration is given of the importance of the cost-push effect in explaining differential price behavior of OECD countries during 1972-76.

[In the cost-benefit analysis of commodity taxes or subsidies, distributional weights complicate the standard textbook "triangle analysis." Net benefits are maximized with optimal subsidies in some circumstances, optimal taxes in others. Demand and supply elasticities play important roles in determining these weighted-welfare effects of commodity taxation. I then explore how to use distributional weights (a) to analyze investment projects and (b) to determine an optimum income-tax structure. In all these applications, the use of distributional weights is shown to have very strong and (to many people) disquieting implications. A final section explores alternative "solutions" to these difficulties.]

[This paper shows that, because of capital accumulation effects, the estate tax may increase inequality of income and wealth. If the government takes actions to offset these accumulation effects, the tax will lead to an increase in equality of income and wealth. More generally, the paper argues that to evaluate the incidence of a tax in a growth context, one should compare policy changes which leave the aggregate capital labor ratio unchanged; we call this balanced growth incidence. But even with the capital labor ratio remaining unchanged, the estate tax may increase inequality in the distribution of consumption.]

A model of labor supply is formulated which takes explicit account of nonlinearities in the budget set which arise because the net, after-tax wage depends on hours worked. These nonlinearities may lead to a convex budget set due to the effect of progressive marginal tax rates, or they may lead to a nonconvex budget set due to the effect of government transfer programs such as AFDC or a negative income tax. The nonlinearities affect both the marginal wage and the "virtual" nonlabor income which the individual faces. The model is estimated on a sample of prime-age males from the Gary negative income tax experiment.