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Taxation and the Taylor principle

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Author Info
Rochelle M. Edge
Jeremy B. Rudd

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Abstract

We add a nominal tax system to a sticky-price monetary business cycle model. When nominal interest income is taxed, the coefficient on inflation in a Taylor-type monetary policy rule must be significantly larger than one in order for the model economy to have a determinate rational expectations equilibrium. When depreciation is treated as a charge against taxable income, an even larger weight on inflation is required in the Taylor rule in order to obtain a determinate and stable equilibrium. These results have obvious implications for assessing the historical conduct of monetary policy.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2002-51.

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Date of creation: 2002
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Handle: RePEc:fip:fedgfe:2002-51

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Keywords: Monetary policy ; Inflation (Finance);

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  2. Darrel Cohen & Kevin A. Hassett & R. Glenn Hubbard, 1999. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Working Papers 6046, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Martin Feldstein, 1982. "Inflation, Capital Taxation, and Monetary Policy," NBER Chapters, in: Inflation: Causes and Effects, pages 153-168 National Bureau of Economic Research, Inc. [Downloadable!]
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  4. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-77, November. [Downloadable!] (restricted)
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  5. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  6. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March. [Downloadable!] (restricted)
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  7. Athanasios Orphanides, 2002. "Monetary policy rules and the Great Inflation," Finance and Economics Discussion Series 2002-8, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  8. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
  9. Martin Feldstein, 1982. "Capital Taxation," NBER Working Papers 0877, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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(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.)

  1. Leith, Campbell & von Thadden, Leopold, 2006. "Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers," Discussion Paper Series 1: Economic Studies 2006,21, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  2. Stefano Eusepi & Bruce Preston, 2008. "Stabilizing Expectations under Monetary and Fiscal Policy Coordination," NBER Working Papers 14391, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Gisle James Natvik, 2006. "Government Spending and the Taylor Principle," Working Paper 2006/11, Norges Bank. [Downloadable!]
    Other versions:
  4. Rochelle M. Edge & Jeremy B. Rudd, 2005. "Temporary partial expensing in a general-equilibrium model," Finance and Economics Discussion Series 2005-19, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Railavo, Jukka, 2003. "Effects of the supply-side channel on stabilisation properties of policy rules," Research Discussion Papers 34/2003, Bank of Finland. [Downloadable!]
  6. Claudia Kwapil & Johann Scharler, 2006. "Interest Rate Pass-Through, Monetary Policy Rules and Macroeconomic Stability," Working Papers 118, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
    Other versions:
  7. Tommy Sveen & Lutz Weinke, 2006. "Firm-specific capital, nominal rigidities, and the Taylor principle," Working Paper 2006/06, Norges Bank. [Downloadable!]
    Other versions:
  8. Seiya Fujisaki & Kazuo Mino, 2008. "Income Taxation, Interest-Rate Control and Macroeconomic Stability with Balanced-Budget," Discussion Papers in Economics and Business 08-20, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP). [Downloadable!]
  9. William T. Gavin & Finn E. Kydland & Michael R. Pakko, 2006. "Monetary policy, taxes and the business cycle," Working Papers 2004-017, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  10. Jukka Railavo, 2004. "Stability consequences of fiscal policy rules," Macroeconomics 0404020, EconWPA. [Downloadable!]
  11. Tommy Sveen & Lutz Weinke, 2004. "Firm-Specific Investment, Sticky Prices, and the Taylor Principle," Economics Working Papers 780, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  12. Franke, Reiner & Flaschel, Peter, 2008. "A Proof of Determinacy in the New-Keynesian Sticky Wages and Prices Model," Economics Working Papers 2008,14, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
  13. Jukka Railavo, 2004. "Effects of the supply-side channel on stabilisation properties of policy rules," Macroeconomics 0404028, EconWPA. [Downloadable!]
  14. 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!]
  15. Railavo , Jukka, 2004. "Stability consequences of fiscal policy rules," Research Discussion Papers 1/2004, Bank of Finland. [Downloadable!]
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