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Monetary and Financial Tax Interventions in Liquidity Traps

William Tayler () and Roy Zilberman

No 257107351, Working Papers from Lancaster University Management School, Economics Department

Abstract: 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)
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Handle: RePEc:lan:wpaper:257107351