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Price stability: some costs and benefits in New Zealand

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Abstract

Among the distortions generated by inflation, those caused by its interaction with taxation are particularly important. Due to the non-indexation of the tax system, inflation exacerbates the inefficiencies generated by taxation. The aim of this paper is to evaluate the welfare effects of these distortions in New Zealand. By using a stylised model of the New Zealand tax system, the tax burden on capital income is calculated for different values of the inflation rate. Following Feldstein (1997a, 1997b), the paper then estimates the welfare effects of going from 2 percent `true' inflation (net of measurement bias) to price stability. The benefits turn out to be about 0.4 percent of GDP, approximately half the size of those calculated by Feldstein for the US, the difference being mainly due to a less distortionary tax system. The permanent benefits are then compared with the one-off output loss that would be involved. As for the US, the result is supportive of price stability, but it does not hold for plausible values of some key parameters.

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Bibliographic Info

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number G98/10.

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Length: 23p
Date of creation: Nov 1998
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Handle: RePEc:nzb:nzbdps:1998/10

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Cited by:
  1. Monika Blaszkiewicz & Jerzy Konieczny & Anna Myslinskaa & Artur Radziwil & Przemyslaw Wozniak, 2003. "Some benefits of reducing inflation in transition economies," Macroeconomics 0303004, EconWPA.
  2. Anne-Marie Brook & Özer Karagedikli & Dean Scrimgeour, 2002. "An optimal inflation target for New Zealand: lessons from the literature," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, September.
  3. Leo Bonato, 1998. "The benefits of price stability: some estimates for New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, September.

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