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About the article
Published Online: 2013-10-12
Published in Print: 2013-01-01
In the prototype economy, the wedge appears as a tax to investment rather than capital holdings. Chari, Kehoe, and McGrattan (2007b) show that in theory, it makes no difference. However, it does affect the probability space for the wedges when we work with approximated economies, though the effect of including a wedge that appears as a tax to investment versus capital holdings is found by Sustek (2010) to be quantitatively irrelevant in the context of the US economy.
The result is robust to different specifications of the breaking point during the crisis.
In this case, the results are more sensitive to the choice of the breaking point, given that we are too close to the end of the sample and the power of the test is thus greatly decreased.
The value of 1.64 is when compared with the 1990s crisis. If compared with the non-crisis periods, the result is still signficant and equal to 1.47.
Bear in mind that (Chari, Kehoe, and McGrattan 2007a) define 1–τl,t as the labor wedge which leads the authors to conclude it to be procyclical.