Monetary Policy and Automatic Stabilizers: the Role of Progressive Taxation

Fabrizio Mattesini and Lorenza Rossi

No 134, Quaderni di Dipartimento from University of Pavia, Department of Economics and Quantitative Methods

Abstract: We study the effects of progressive labor income taxation in an otherwise standard NK model. We show that progressive taxation (i) introduces a trade-off between output and inflation stabilization and affects the slope of the Phillips Curve; (ii) acts as automatic stabilizer changing the responses of the economy to technology shocks and demand shocks (iii) alters the prescription for the optimal discretionary interest rate rule. We also show that the welfare gains from commitment decrease as labor income taxes become more progressive. Quantitatively, the model is able to reproduce the observed negative correlation between the volatility of output, hours and in?ation and the degree of progressivity of labor income taxation.

JEL-codes: E50 E52 E58 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2010-11
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Monetary Policy and Automatic Stabilizers: The Role of Progressive Taxation (2012)
Journal Article: Monetary Policy and Automatic Stabilizers: The Role of Progressive Taxation (2012)
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