Tax Rules to Prevent Expectations-driven Liquidity Trap

Yoichiro Tamanyu

No 2019-005, Keio-IES Discussion Paper Series from Institute for Economics Studies, Keio University

Abstract: This paper demonstrates that a simple Ricardian tax policy responding to inflation can prevent expectations-driven liquidity trap (ELT) using a standard New Keynesian model. I show that the extent to which tax rates must respond to inflation is affected by the persistence of remaining at the ELT and higher persistence requires larger response to inflation. I further find that if the ELT is assumed to be recurrent, the tax rate needs to respond to inflation by a larger extent compared to the case where the targeted regime is assumed to be absorbing. This last finding indicates that it is crucial for the fiscal authority to entertain the possibility of moving back to the ELT when it sets their policy parameters.

Keywords: Expectations-driven Liquidity Trap; Fiscal Policy; Monetary Policy; Regime Switching; Zero Lower Bound (search for similar items in EconPapers)
JEL-codes: E61 E62 E63 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2019-01-29
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: TAX RULES TO PREVENT EXPECTATIONS-DRIVEN LIQUIDITY TRAPS (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:keo:dpaper:2019-005

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