Monetary Policy, Taxes, and the Business Cycle

Michael Pakko, William Gavin (wmgavin@gmail.com) and Finn Kydland

No 32, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: In this paper we model the contribution of monetary growth shocks to aggregate fluctuations. Our innovation is to combine persistent money growth shocks with taxes on nominal capital gains in a model in which the central bank operates policy using an interest rate rule. All three features are necessary for us to generate large effects of monetary shocks, but they are also realistic features of the U.S. economy. All three have been examined in isolation and, by themselves, do not contribute much to aggregate fluctuations. Capital gains taxes are important when there are persistent changes in the inflation rate. Money growth shocks do not cause persistence changes in inflation when the central bank uses a money growth rule. When the central bank operates policy using an interest rate rule persistent money growth shocks do lead to persistence in inflation, raising both the nominal value of capital and the effective marginal capital gains tax rate.

Keywords: Inflation; Taxation; Business Cycle (search for similar items in EconPapers)
JEL-codes: E31 E32 E42 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Monetary policy, taxes, and the business cycle (2007)
Working Paper: Monetary policy, taxes and the business cycle (2006)
Working Paper: Monetary Policy, Taxes, and the Business Cycle (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:32

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