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Progressive consumption tax and monetary policy in an endogenous growth model

Zhiming Fu () and Antoine Le Riche
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Zhiming Fu: Sichuan University

Journal of Economics, 2021, vol. 133, issue 3, No 3, 293 pages

Abstract: Abstract This paper analyzes the impact of the interaction between monetary policy and fiscal policy on the stability of an one-sector AK economy. The monetary authority pegs the money growth factor while the fiscal authority implements a progressive consumption tax. The demand of money is motivated by a fractional liquidity constraint on consumption expenditures. When only the monetary authority operates, the unique steady state is locally indeterminate if the intertemporal elasticity of substitution in consumption is low enough. When the fiscal authority is introduced, the interaction of fiscal policy and monetary policy modifies significantly the stability properties. In particular, the fiscal authority could either stabilize or destabilize the economy depending on the tax progressivity, the strength of the liquidity constraint and the intertemporal elasticity of substitution. Our numerical examples further verify those theoretical results.

Keywords: Cash-in-advance; Progressive taxation; Constant money growth; Instability (search for similar items in EconPapers)
JEL-codes: E32 E52 O41 O42 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:133:y:2021:i:3:d:10.1007_s00712-021-00732-0

DOI: 10.1007/s00712-021-00732-0

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