Distortionary tax instruments and implementable monetary policy

Luigi Marattin, Massimiliano Marzo and Paolo Zagaglia

International Review of Economics & Finance, 2013, vol. 25, issue C, 219-243

Abstract: We introduce distortionary taxes on consumption, labor and capital income into a New Keynesian model with Calvo pricing and nominal bonds. We study the relation between tax instruments and optimal monetary policy by computing simple rules for monetary and fiscal policy when one tax instrument at a time varies, while the other two are fixed at their steady-state level. The optimal rules maximize the second-order approximation to intertemporal utility. Three results emerge: (a) when prices are sticky, perfect inflation stabilization is optimal independently from the tax instrument adopted; (b) the optimal degree of responsiveness of monetary policy to output varies depending on which tax instrument induces fluctuations in the average tax rate; (c) when prices are flexible, fiscal rules that prescribe unexpected variations in the price level to support debt changes are always welfare-maximizing.

Keywords: Nominal rigidities; Distortionary taxation; Monetary-policy rules (search for similar items in EconPapers)
JEL-codes: E52 E61 E63 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Distortionary Tax Instruments and Implementable Monetary Policy (2010)
Working Paper: Distortionary tax instruments and implementable monetary policy (2009)
Working Paper: Distortionary Tax Instruments and Implementable Monetary Policy (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:25:y:2013:i:c:p:219-243

DOI: 10.1016/j.iref.2012.07.006

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