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Optimal Monetary Policy and Interest Income Taxation

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  • Eurilton Araújo

Abstract

This paper studies optimal discretionary monetary policy when the basic new Keynesian model is extended to incorporate interest income taxation. The elasticities of ináation and the output gap to supply and demand shocks are increasing functions of the tax rate. Moreover, numerical simulations show that high levels of taxation increase ináation volatility, the output gap volatility and the unconditional expectation of the central bankís loss function.

Suggested Citation

  • Eurilton Araújo, 2008. "Optimal Monetary Policy and Interest Income Taxation," Business and Economics Working Papers 037, Unidade de Negocios e Economia, Insper.
    • Handle: RePEc:aap:wpaper:037
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    File URL: https://repositorio.insper.edu.br/handle/11224/5770
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    References listed on IDEAS

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    1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, vol. 114(2), pages 198-230, February.
    3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under imperfect competition," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 183-209, June.
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