Distortionary taxation and interest rate policy

Takushi Kurozumi

Journal of Macroeconomics, 2010, vol. 32, issue 1, 476-491

Abstract: In a cashless economy with strictly inflation-forecast-targeting interest rate policy, recent research shows that in the presence of distorting taxes, a balanced-budget taxation policy is likely to induce indeterminacy of equilibrium but a debt-targeting one is not, suggesting that short-run budget deficits play a role in stabilizing the economy. The present paper finds that this result is overturned in a monetary economy with flexibly inflation-forecast-targeting interest rate policy. The balanced-budget policy is likely to ensure determinacy together with the flexibly inflation-forecast-targeting policy, but the debt-targeting one may lead to indeterminacy in the monetary economy.

Keywords: Distorting; taxes; Balanced-budget; taxation; policy; Debt-targeting; taxation; policy; Inflation-forecast-targeting; interest; rate; policy; Equilibrium; determinacy (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:32:y:2010:i:1:p:476-491

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