Distortionary Tax Instruments and Implementable Monetary Policy

Paolo Zagaglia

No 2007:5, Research Papers in Economics from Stockholm University, Department of Economics

Abstract: I introduce distortionary taxes on consumption, labor and capital income into a New Keynesian model with Calvo pricing and nominal bonds. I 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)
Pages: 41 pages
Date: 2007-05-21
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www2.ne.su.se/paper/wp07_05.pdf (application/pdf)

Related works:
Journal Article: Distortionary tax instruments and implementable monetary policy (2013)
Working Paper: Distortionary Tax Instruments and Implementable Monetary Policy (2010)
Working Paper: Distortionary tax instruments and implementable monetary policy (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:2007_0005

Access Statistics for this paper

More papers in Research Papers in Economics from Stockholm University, Department of Economics Department of Economics, Stockholm, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Anne Jensen ( this e-mail address is bad, please contact ).