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Monetary-Fiscal Policy Interactions and the Price Level: Background and Beyond

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  • Eric M. Leeper
  • Tack Yun

Abstract

The paper presents the fiscal theory of the price level in a variety of models, including endowment economies with lump-sum taxes and production economies with proportional income taxes. We offer a microeconomic perspective on the fiscal theory by computing a Slutsky-Hicks decomposition of the effects of tax changes into substitution, wealth, and revaluation effects. Revaluation effects arise whenever tax changes alter the value of outstanding nominal government liabilities by changing the price level. Under certain assumptions on monetary and fiscal behavior, the revaluation effect reflects the fiscal theory mechanism. When taxes distort, two Laffer curves arise, implying that a tax increase can lower or raise the price level and the revaluation effect can be positive or negative, depending on which side of a particular Laffer curve the economy resides.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11646.

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Date of creation: Oct 2005
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:11646

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Cited by:
  1. Harald Uhlig & Mathias Trabandt, 2009. "How Far are We from the Slippery Slope? The Laffer Curve Revisited," Working Papers, Becker Friedman Institute for Research In Economics 2009-005, Becker Friedman Institute for Research In Economics.
  2. Alessandro Piergallini & Giorgio Rodano, 2012. "Public Debt, Distortionary Taxation, and Monetary Policy," CEIS Research Paper, Tor Vergata University, CEIS 220, Tor Vergata University, CEIS, revised 07 Feb 2012.
  3. A. Schabert & L. v. Thadden, 2006. "Distortionary Taxation, Debt, and the Price Level," Computing in Economics and Finance 2006, Society for Computational Economics 75, Society for Computational Economics.
  4. Nikolai Stähler, 2013. "Recent Developments In Quantitative Models Of Sovereign Default," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 27(4), pages 605-633, 09.
  5. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(4), pages 305-327.
  6. Truong Nguyen, 2013. "Estimating India's Fiscal Reaction Function," ASARC Working Papers, The Australian National University, Australia South Asia Research Centre 2013-05, The Australian National University, Australia South Asia Research Centre.
  7. Luciano Greco, 2008. "A Note on Social Security and Public Debt," "Marco Fanno" Working Papers, Dipartimento di Scienze Economiche "Marco Fanno" 0083, Dipartimento di Scienze Economiche "Marco Fanno".
  8. 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, Bank of Greece 71, Bank of Greece.
  9. Óscar J. Arce, 2005. "Reflections on fiscalist divergent price-paths," Banco de Espa�a Working Papers, Banco de Espa�a 0533, Banco de Espa�a.
  10. Chronis Panagiotis, 2009. "Modeling Distortionary Taxation," Working Papers, Bank of Greece 95, Bank of Greece.

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