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Monetary Policy and Automatic Stabilizers: the Role of Progressive Taxation

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Author Info

  • Fabrizio Mattesini

    (University of Rome "Tor Vergata")

  • Lorenza Rossi

    ()
    (Department of Economics and Quantitative Methods, University of Pavia)

Abstract

We study the effects of progressive labor income taxation in an otherwise standard NK model. We show that progressive taxation (i) introduces a trade-off between output and inflation stabilization and affects the slope of the Phillips Curve; (ii) acts as automatic stabilizer changing the responses of the economy to technology shocks and demand shocks (iii) alters the prescription for the optimal discretionary interest rate rule. We also show that the welfare gains from commitment decrease as labor income taxes become more progressive. Quantitatively, the model is able to reproduce the observed negative correlation between the volatility of output, hours and in?ation and the degree of progressivity of labor income taxation.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/wpaper/q134.pdf
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Bibliographic Info

Paper provided by University of Pavia, Department of Economics and Quantitative Methods in its series Quaderni di Dipartimento with number 134.

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Length: 43 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:pav:wpaper:134

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Cited by:
  1. Kremer, Jana & Stähler, Nikolai, 2013. "Structural and cyclical effects of tax progression," Discussion Papers 15/2013, Deutsche Bundesbank, Research Centre.
  2. Merkl, Christian & Balleer, Almut & Gehrke, Britta & Lechthaler, Wolfgang, 2013. "Does Short-Time Work Save Jobs? A Business Cycle Analysis," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79718, Verein für Socialpolitik / German Economic Association.

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