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Distortionary Taxation, Debt, and the Price Level

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  • ANDREAS SCHABERT
  • LEOPOLD VON THADDEN

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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Bibliographic Info

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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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July.
  2. Canzoneri, Matthew B. & Diba, Behzad T., 2005. "Interest rate rules and price determinacy: The role of transactions services of bonds," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 329-343, March.
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  8. Jean-Pascal Benassy, 2000. "Price Level Determinacy under a Pure Interest Rate Peg," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 194-211, January.
  9. Stephanie Schmitt-Grohe & Martin Uribe, 1997. "Price level determinacy and monetary policy under a balanced-budget requirement," Finance and Economics Discussion Series 1997-17, Board of Governors of the Federal Reserve System (U.S.).
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  11. Eric Leeper & Tack Yun, 2006. "Monetary-fiscal policy interactions and the price level:Background and beyond," International Tax and Public Finance, Springer, vol. 13(4), pages 373-409, August.
  12. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  13. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
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  15. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
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Cited by:
  1. Schabert, Andreas, 2010. "Monetary policy under a fiscal theory of sovereign default," Journal of Economic Theory, Elsevier, vol. 145(2), pages 860-868, March.
  2. Andreas Schabert, 2009. "Monetary Policy under a Fiscal Theory of Sovereign Default," Tinbergen Institute Discussion Papers 09-093/2, Tinbergen Institute.
  3. Yuting Bai & Tatiana Kirsanova, 2013. "Infrequent Fiscal Stabilization," Working Papers 2013_01, Business School - Economics, University of Glasgow.

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