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Monetary-fiscal policy interactions and the price level:Background and beyond

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  • Eric Leeper

    ()

  • Tack Yun

    ()

Abstract

The paper presents the fiscal theory of the price level in a variety of models, including endowment economies with lump-sum taxes and production economies with proportional income taxes. We offer a microeconomic perspective on the fiscal theory by computing a Slutsky-Hicks decomposition of the effects of tax changes into substitution, wealth, and revaluation effects. Revaluation effects arise whenever tax changes alter the value of outstanding nominal government liabilities by changing the price level. Under certain assumptions on monetary and fiscal behavior, the revaluation effect reflects the fiscal theory mechanism. When taxes distort, two Laffer curves arise, implying that a tax increase can lower or raise the price level and the revaluation effect can be positive or negative, depending on which side of a particular Laffer curve the economy resides. Copyright Springer Science + Business Media, LLC 2006

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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 13 (2006)
Issue (Month): 4 (August)
Pages: 373-409

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Handle: RePEc:kap:itaxpf:v:13:y:2006:i:4:p:373-409

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Web page: http://www.springerlink.com/link.asp?id=102915

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Keywords: Income taxes; Inflation; Debt revaluation; Laffer curve;

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Citations

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Cited by:
  1. Luciano Greco, 2008. "A Note on Social Security and Public Debt," "Marco Fanno" Working Papers 0083, Dipartimento di Scienze Economiche "Marco Fanno".
  2. Schabert, Andreas & von Thadden, Leopold, 2006. "Distortionary taxation, debt, and the price level," Working Paper Series 0577, European Central Bank.
  3. Piergallini, Alessandro & Rodano, Giorgio, 2009. "Public Debt, Distortionary Taxation, and Monetary Policy," MPRA Paper 15348, University Library of Munich, Germany.
  4. Truong Nguyen, 2013. "Estimating India's Fiscal Reaction Function," ASARC Working Papers 2013-05, The Australian National University, Australia South Asia Research Centre.
  5. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  6. Chronis Panagiotis, 2009. "Modeling Distortionary Taxation," Working Papers 95, Bank of Greece.
  7. Óscar J. Arce, 2005. "Reflections on fiscalist divergent price-paths," Banco de Espa�a Working Papers 0533, Banco de Espa�a.
  8. 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.
  9. Stähler, Nikolai, 2011. "Recent developments in quantitative models of sovereign default," Discussion Paper Series 1: Economic Studies 2011,17, Deutsche Bundesbank, Research Centre.

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