Distortionary Taxation, Debt, and the Price Level

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Distortionary Taxation, Debt, and the Price Level

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ANDREAS SCHABERT
LEOPOLD VON THADDEN

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Andreas Schabert

Abstract

This paper compares the determinacy of equilibria under exogenous interest rates in an economy with a cash constraint, in which taxation is lump-sum or distortionary. Under passive fiscal policies lump-sum taxes generate nominal indeterminacy, while with distortionary taxes indeterminacy can be real, but not purely nominal. In general, under distortionary taxation uniqueness of the equilibrium allocation depends on monetary and fiscal policy interactions through taxes, debt, and interest rates. To illustrate this principle, we consider balanced-budget policies under distortionary income taxation and show that a unique equilibrium allocation prevails if interest rates are set consistent with long-run deflation. A separate section extends the analysis to endogenous interest rates. Copyright (c) 2009 The Ohio State University.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 1 (02)
Pages: 159-188
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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:1:p:159-188

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Paper
- Andreas Schabert & Leopold von Thadden, 2006. "Distortionary taxation, debt, and the price level," Working Paper Series 577, European Central Bank. [Downloadable!]
- A. Schabert & L. v. Thadden, 2006. "Distortionary Taxation, Debt, and the Price Level," Computing in Economics and Finance 2006 75, Society for Computational Economics. [Downloadable!]

References listed on IDEAS
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Other versions:
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Other versions:
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Full references

Cited by:
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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. [Downloadable!]

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