Fiscal Progressivity and the Time Consistency of Monetary Policy

Antoine Camous

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: This paper studies how progressive fiscal policy influences the conduct of monetary policy in a tractable heterogeneous agent economies. A priori, progressive labor taxation is undesirable because it generates costly distortions. Nonetheless, it is an effective instrument to mitigate the inflation bias of monetary policy because it achieves a redistributive purpose. I analyze this commitment channel of progressive labor taxes through the lens of political conflicts. When agents vote on monetary and fiscal instruments, progressivity is decisive in curbing the inflation bias because it generates distributional conflicts, lower-productivity agents support higher labor taxes to preserve the consumption value of money holding and shift the burden of policy distortions to higher-productivity agents. Anticipating the reduction in inflation, agents unanimously desire to adopt a progressive fiscal system.

Keywords: Monetary-Fiscal Policy; Progressive Labor Income Taxes; Inflation Bias; Time Consistency; Political Economy; Heterogeneous Agents (search for similar items in EconPapers)
JEL-codes: E02 E42 E52 E61 E62 (search for similar items in EconPapers)
Pages: 32
Date: 2023-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2023_387

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