Monetary policy, taxes and the business cycle

William Thomas Gavin (), Finn E. Kydland and Michael Pakko ()

No 2004-017, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper analyzes the interaction of inflation with the tax code and its contribution to aggregate fluctuations. We find significant effects operating through the tax on realized nominal capital gains. A tax on nominal bond income magnifies these effects. Our innovation is to combine monetary policy shocks with non-indexed taxes in a model where the central bank implements policy using an interest rate rule. Monetary policy had important effects on the behavior of the business cycle before 1980 because policymakers did not exert effective control over inflation. Monetary policy reform around 1980 led to better control, and with more stable inflation, the effect of the interaction between monetary policy and the nominal capital gains tax has become negligible.

Keywords: Inflation (Finance); Business cycles; Taxation (search for similar items in EconPapers)
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Date: 2006
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Related works:
Working Paper: Monetary Policy, Taxes, and the Business Cycle (2004)
Working Paper: Monetary Policy, Taxes, and the Business Cycle (2005)
Journal Article: Monetary policy, taxes, and the business cycle (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:fip:fedlwp:2004-017

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