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Unconventional Taxation Policy, Financial Frictions and Liquidity Traps

William Tayler () and Roy Zilberman ()

No 10741, EcoMod2017 from EcoMod

Abstract: The cyclical properties of private asset income taxation are studied in a New Keynesian model with financial frictions. We argue that optimal state-contingent variations in asset income taxation increase welfare, alter the monetary policy transmission mechanism and insure against liquidity traps. These findings are explained by an endogenous association amongst taxation, the effective rate of return on assets, the inflationary output gap and credit spreads. Such unique link operates via a working-capital cost channel, and affords the policy maker an additional degree of freedom in stabilizing the economy. Optimal policy calls for lowering (increasing) asset income taxation following financial (demand) shocks.

Keywords: Global; Monetary issues; Business cycles (search for similar items in EconPapers)
Date: 2017-07-04
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