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Monetary policy, taxes, and the business cycle

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  • Gavin, William T.
  • Kydland, Finn E.
  • Pakko, Michael R.

Abstract

This paper analyzes the interaction of inflation with the tax code and its contribution to aggregate fluctuations. We find significant effects operating through the tax on realized nominal capital gains. A tax on nominal bond income magnifies these effects. Our innovation is to combine monetary policy shocks with non-indexed taxes in a model where the central bank implements policy using an interest rate rule. Monetary policy had important effects on the behavior of the business cycle before 1980 because policymakers did not exert effective control over inflation. Monetary policy reform around 1980 led to better control, and with more stable inflation, the effect of the interaction between monetary policy and the nominal capital gains tax has become negligible.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 54 (2007)
Issue (Month): 6 (September)
Pages: 1587-1611

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Handle: RePEc:eee:moneco:v:54:y:2007:i:6:p:1587-1611

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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Citations

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Cited by:
  1. Anagnostopoulos, Alexis & Cárceles-Poveda, Eva & Lin, Danmo, 2012. "Dividend and capital gains taxation under incomplete markets," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 599-611.
  2. Anatoliy Belaygorod & Michael J. Dueker, 2005. "Discrete monetary policy changes and changing inflation targets in estimated dynamic stochastic general equilibrium models," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 719-34.
  3. Panagiotis Chronis & Aspassia Strantzalou, 2008. "Monetary and Fiscal Policy Interaction: What is the Role of the Transaction Cost of the Tax System in Stabilisation Policies?," Working Papers 71, Bank of Greece.
  4. Finn E. Kydland & Fei Mao & William T. Gavin, 2011. "Monetary Policy, the Tax Code, and Energy Price Shocks," 2011 Meeting Papers 1160, Society for Economic Dynamics.
  5. William T. Gavin & Benjamin D. Keen & Finn E. Kydland, 2013. "Monetary policy, the tax code, and the real effects of energy shocks," Working Papers 1304, Federal Reserve Bank of Dallas.

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