Tax on Inflation Policy at the Zero Lower Bound

Damien Capelle and Yang Liu

No 2026/059, IMF Working Papers from International Monetary Fund

Abstract: This paper evaluates the effectiveness and robustness of a Tax on Inflation Policy (TIP) for improving welfare at the Zero Lower Bound (ZLB) in a New Keynesian model. When the ZLB results from a fall in the neutral interest rate, a negative TIP mitigates deflationary pressures, narrows the output gap, and implements the constrained-efficient allocation. When the ZLB is driven by self-fulfilling expectations, TIP can eliminate the deflationary equilibrium altogether. A rule that responds aggressively to inflation with a negative intercept proves robust across scenarios. Using a medium-scale model calibrated to Japan, we quantify a robust TIP rule that would have lifted the economy out of its liquidity trap.

Keywords: Deflation; Zero Lower Bound; Liquidity Trap; Tax on Inflation; Taxbased Incomes Policies; Externality; TIP rule; liquidity trap equilibrium; inflation rate; inflation-targeting TIP; price Phillips curve; cost-push shock; TIP rate; self-fulfilling liquidity trap; interest rate; Inflation; Liquidity; Output gap; Global (search for similar items in EconPapers)
Pages: 76
Date: 2026-03-27
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pbe
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