Speed of adjustment and self-fulfilling failure of economic reform

Article Abstract:

An economic reform programme where inefficient public labour is laid off is considered. The immediate effect is a lowering of wages and increased profitability in the private modern sector. Over time, as capital accumulates in the modern sector, wages and production increases. Big bang reform generates a sharp transitory drop in wages while gradual reform gives a more modest decline. In the presence of a subsistence wage constraint popular resistance can cause the cancellation of big bang reform. Two arguments for gradualism can in that case be made. First, a more gradual reform requires a less abrupt Drop in the wage, and will therefore be feasible. Second, the initial wage drop will be stronger if a cancellation of reform is expected and, since cancellation is dependent on the severity of the initial wage drop, multiple equilibria occurs. The existence of multiple equilibria is dependent on the speed of reform. Sufficiently gradual programmes have a unique successful equilibrium. [C] 2001 Elsevier Science B.V. All rights reserved. Keywords: Economic reform; Multiple equilibria JEL classification: O11; E61

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Tax policy and consumer spending: evidence from Japanese fiscal experiments

Article Abstract:

This paper studies the extent to which the impact of tax policy on consumer spending differs between temporary and permanent, as well as anticipated and unanticipated tax changes. To discriminate between them, we use institutional information such as legal distinction between temporary and permanent tax changes, as well as timing of policy announcement and implementation. We find that the impact of temporary changes is significantly smaller than the impact of permanent tax changes. We also find that more than 80 percent of Japanese consumers, including those who distinguish between temporary and permanent tax changes, respond to tax changes at the time of their implementation and not at the time of policy announcement. We suggest an interpretation that these consumers follow a near-rational decision rule. [C] 2001 Elsevier Science B.V. All rights reserved. Keywords: Consumption; Permanent income hypothesis; Taxation; Near-rationality JEL classification: E21; H31

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