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Indexing the income tax code, monetary/fiscal interaction, and the great moderation

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  • Keinsley, Andrew

Abstract

This paper considers the consequences of automatically indexing the US federal income tax code to inflation. Indexation, implemented during the 1981 federal tax overhaul, and active monetary policy constitute necessary conditions for a unique rational expectations equilibrium in standard New Keynesian models with a generalized, progressive labor income tax. Additionally, fixing the monetary regime shows that indexation reduces overall volatility in the model as well as the contribution of supply-side disturbances. Together, these results support a fiscal extension to the “good policy” hypothesis of the Great Moderation and encourage further indexation of the United States tax code.

Suggested Citation

  • Keinsley, Andrew, 2016. "Indexing the income tax code, monetary/fiscal interaction, and the great moderation," European Economic Review, Elsevier, vol. 89(C), pages 1-20.
  • Handle: RePEc:eee:eecrev:v:89:y:2016:i:c:p:1-20
    DOI: 10.1016/j.euroecorev.2016.06.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary–fiscal coordination; Taxation; Inflation indexed; Great moderation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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