Distortionary taxation, debt, and the price level

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Distortionary taxation, debt, and the price level

Author Info

Andreas Schabert () (University of Amsterdam, Department of Economics, Roeterstraat 11, 1018 WB Amsterdam, The Netherlands.)
Leopold von Thadden () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)

Additional information is available for the following registered author(s):

Andreas Schabert

Abstract

This paper considers the nominal and real determinacy of equilibria under an exogenously specified path of interest rates in an economy in which taxation is either lump-sum or distortionary. Under lump-sum taxation, we confirm the well-known finding that equilibria display nominal (in)determinacy if the primary surplus is exogenous (endogenous). Under distortionary taxation, this classification is no longer relevant. Nominal determinacy is always ensured since distortionary taxes establish a link between the allocation and the sequences of taxes and debt and, hence, the price level, regardless of whether the primary surplus is exogenous or endogenous. Distortionary taxation, however, increases the scope for real indeterminacy. As a general feature, the real (in)determinacy of equilibria depends on the interaction of fiscal and monetary policies, i.e. on the sequences of taxes, debt, and interest rates. If, for example, fiscal policy runs a balanced budget the central bank should set the nominal interest rate in a way consistent with long-run deflation in order to ensure real determinacy. This finding is different from a balanced-budget policy under lump-sum taxes where no such qualification with respect to the interest rate needs to be made. JEL Classification: E31; E63.

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Paper provided by European Central Bank in its series Working Paper Series with number 577.

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Length: 28 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:ecb:ecbwps:20060577

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Article
- Andreas Schabert & Leopold Von Thadden, 2009. "Distortionary Taxation, Debt, and the Price Level," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 159-188, 02. [Downloadable!] (restricted)
Paper
- 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!]

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-01-24 (All new papers)
NEP-MAC-2006-01-24 (Macroeconomics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Other versions:
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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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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