This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Monetary policy, taxes and the business cycle

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
William T. Gavin
Finn E. Kydland
Michael R. Pakko

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

Abstract

This paper analyzes the interaction of inflation with the tax code and its contribution to aggregate fluctuations. We find significant effects operating through the tax on realized nominal capital gains. A tax on nominal bond income magnifies these effects. Our innovation is to combine monetary policy shocks with non-indexed taxes in a model where the central bank implements policy using an interest rate rule. Monetary policy had important effects on the behavior of the business cycle before 1980 because policymakers did not exert effective control over inflation. Monetary policy reform around 1980 led to better control, and with more stable inflation, the effect of the interaction between monetary policy and the nominal capital gains tax has become negligible.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://research.stlouisfed.org/wp/2004/2004-017.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-017.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 2006
Date of revision:
Handle: RePEc:fip:fedlwp:2004-017

Contact details of provider:
Postal: P.O. Box 442, St. Louis, MO 63166
Fax: (314)444-8753
Web page: http://www.stlouisfed.org/
More information through EDIRC

Order Information:
Email:

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Inflation (Finance) ; Business cycles ; Taxation;

Other versions of this item:

This paper has been announced in the following NEP Reports: 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.:
  1. William T. Gavin & Finn E. Kydland, 1999. "Endogenous Money Supply and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 347-369, April. [Downloadable!] (restricted)
    Other versions:
  2. Rochelle M. Edge & Jeremy B. Rudd, 2002. "Taxation and the Taylor principle," Finance and Economics Discussion Series 2002-51, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Kim, Chang-Jin & Nelson, Charles R & Piger, Jeremy, 2004. "The Less-Volatile U.S. Economy: A Bayesian Investigation of Timing, Breadth, and Potential Explanations," Journal of Business & Economic Statistics, American Statistical Association, vol. 22(1), pages 80-93, January.
    Other versions:
  4. Ellingsen, Tore & Söderström, Ulf, 2004. "Why are Long Rates Sensitive to Monetary Policy?," CEPR Discussion Papers 4360, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January. [Downloadable!] (restricted)
  6. Charles Ka-Yui Leung & Guang-Jia Zhang, 2000. "Inflation and Capital Gains Taxes in a Small Open Economy," Departmental Working Papers _119, Chinese University of Hong Kong, Department of Economics.
    Other versions:
  7. Alan J. Auerbach, 1988. "Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-2), pages 595-638. [Downloadable!]
  8. Poterba, James M., 1987. "How burdensome are capital gains taxes?: Evidence from the United States," Journal of Public Economics, Elsevier, vol. 33(2), pages 157-172, July. [Downloadable!] (restricted)
  9. 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)
    Other versions:
  10. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
    Other versions:
  11. David Altig & Charles T. Carlstrom, 1991. "Inflation, personal taxes, and real output: a dynamic analysis," Working Paper 9102, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  12. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June. [Downloadable!] (restricted)
    Other versions:
  13. Christina D. Romer & David H. Romer, 1997. "Reducing Inflation: Motivation and Strategy," NBER Books, National Bureau of Economic Research, Inc, number rome97-1, Summer.
  14. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Timing and real indeterminacy in monetary models," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 285-298, April. [Downloadable!] (restricted)
    Other versions:
  15. Chang, Ly-June, 1995. "Business cycles with distorting taxes and disaggregated capital markets," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 985-1009. [Downloadable!] (restricted)
  16. Sharon Kozicki & P.A. Tinsley, 2003. "Permanent and transitory policy shocks in an empirical macro model with asymmetric information," Research Working Paper RWP 03-09, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  17. Daniel Feenberg & James Poterba, 2003. "The Alternative Minimum Tax and Effective Marginal Tax Rates," NBER Working Papers 10072, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Protopapadakis, Aris, 1983. "Some Indirect Evidence on Effective Capital Gains Tax Rates," Journal of Business, University of Chicago Press, vol. 56(2), pages 127-38, April. [Downloadable!] (restricted)
  19. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  20. Kydland, Finn E, 1991. "Inflation, Personal Taxes, and Real Output: A Dynamic Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 575-79, August. [Downloadable!] (restricted)
  21. Michael R. Pakko, 2002. "What Happens When the Technology Growth Trend Changes?: Transition Dynamics, Capital Growth and the 'New Economy'," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 376-407, April. [Downloadable!] (restricted)
    Other versions:
  22. Bennett T. McCallum & Marvin S. Goodfriend, 1987. "Money: Theoretical Analysis of the Demand for Money," NBER Working Papers 2157, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  23. Marco Lyrio & Hans Dewachter, 2004. "Filtering Long-Run Inflation Expectations with a Structural Macro Model of the Yield Curve," Computing in Economics and Finance 2004 188, Society for Computational Economics. [Downloadable!]
  24. Michael R. Pakko, 1998. "Shoe-leather costs of inflation and policy credibility," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 37-50. [Downloadable!]
  25. Balcer, Yves & Judd, Kenneth L, 1987. " Effects of Capital Gains Taxation on Life-Cycle Investment and Portfolio Management," Journal of Finance, American Finance Association, vol. 42(3), pages 743-58, July. [Downloadable!] (restricted)
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.)

  1. Anatoliy Belaygorod & Michael J. Dueker, 2005. "Discrete monetary policy changes and changing inflation targets in estimated dynamic stochastic general equilibrium models," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 719-34. [Downloadable!]
  2. 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!]
Statistics
Access and download statistics

Did you know? A tutorial is available.

This page was last updated on 2009-10-30.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.