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Monetary-fiscal policy interactions and the price level:Background and beyond

Eric Leeper () and Tack Yun ()

International Tax and Public Finance, 2006, vol. 13, issue 4, 373-409

Abstract: The paper presents the fiscal theory of the price level in a variety of models, including endowment economies with lump-sum taxes and production economies with proportional income taxes. We offer a microeconomic perspective on the fiscal theory by computing a Slutsky-Hicks decomposition of the effects of tax changes into substitution, wealth, and revaluation effects. Revaluation effects arise whenever tax changes alter the value of outstanding nominal government liabilities by changing the price level. Under certain assumptions on monetary and fiscal behavior, the revaluation effect reflects the fiscal theory mechanism. When taxes distort, two Laffer curves arise, implying that a tax increase can lower or raise the price level and the revaluation effect can be positive or negative, depending on which side of a particular Laffer curve the economy resides. Copyright Springer Science + Business Media, LLC 2006

Keywords: Income taxes; Inflation; Debt revaluation; Laffer curve (search for similar items in EconPapers)
Date: 2006
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Working Paper: Monetary-Fiscal Policy Interactions and the Price Level: Background and Beyond (2005) Downloads
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