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Monetary Policy, Taxes, and the Business Cycle

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  • Michael R. Pakko
  • William T. Gavin
  • Finn E. Kydland

Abstract

In this paper we model the contribution of monetary growth shocks to aggregate fluctuations. Our innovation is to combine persistent money growth shocks with taxes on nominal capital gains in a model in which the central bank operates policy using an interest rate rule. All three features are necessary for us to generate large effects of monetary shocks, but they are also realistic features of the U.S. economy. All three have been examined in isolation and, by themselves, do not contribute much to aggregate fluctuations. Capital gains taxes are important when there are persistent changes in the inflation rate. Money growth shocks do not cause persistence changes in inflation when the central bank uses a money growth rule. When the central bank operates policy using an interest rate rule persistent money growth shocks do lead to persistence in inflation, raising both the nominal value of capital and the effective marginal capital gains tax rate.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 32.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:32

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Keywords: Inflation; Taxation; Business Cycle;

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Citations

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Cited by:
  1. William T. Gavin & Benjamin D. Keen & Finn E. Kydland, 2013. "Monetary policy, the tax code, and the real effects of energy shocks," Working Papers 2013-019, Federal Reserve Bank of St. Louis.
  2. 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.
  3. Alexis Anagnostopoulos & Eva Carceles-Poveda, 2010. "Dividend and Capital Gains Taxation under Incomplete Markets," Department of Economics Working Papers 10-06, Stony Brook University, Department of Economics.
  4. 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.
  5. Finn E. Kydland & Fei Mao & William T. Gavin, 2011. "Monetary Policy, the Tax Code, and Energy Price Shocks," 2011 Meeting Papers 1160, Society for Economic Dynamics.

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