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Distortionary taxation and interest rate policy

  • Kurozumi, Takushi

In a cashless economy with strictly inflation-forecast-targeting interest rate policy, recent research shows that in the presence of distorting taxes, a balanced-budget taxation policy is likely to induce indeterminacy of equilibrium but a debt-targeting one is not, suggesting that short-run budget deficits play a role in stabilizing the economy. The present paper finds that this result is overturned in a monetary economy with flexibly inflation-forecast-targeting interest rate policy. The balanced-budget policy is likely to ensure determinacy together with the flexibly inflation-forecast-targeting policy, but the debt-targeting one may lead to indeterminacy in the monetary economy.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 1 (March)
Pages: 476-491

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:1:p:476-491
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