Monetary and Financial Tax Interventions in Liquidity Traps
William Tayler () and
No 257107351, Working Papers from Lancaster University Management School, Economics Department
We characterize the joint optimal conduct of unconventional monetary and financial tax policies in a New Keynesian model wherein endogenous supply-side financial frictions generate inflationary credit spreads. Cost-push borrowing costs and private asset taxes substantially alter the transmission of optimal monetary policy under both discretion and commitment. State-contingent asset tax regimes remove the zero lower bound restriction on the nominal policy rate, thus minimizing output and price fluctuations following both supply-driven and demand-driven liquidity traps. Discretionary and commitment policies with financial taxation deliver virtually equivalent welfare gains, and invalidate calls for time-inconsistent forward guidance strategies.
Keywords: deposit taxation; credit cost channel; optimal policy; discretion vs. commitment; zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 E58 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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