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Price stability: some costs and benefits in New Zealand

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Abstract

Among the distortions generated by inflation, those caused by its interaction with taxation are particularly important. Due to the non-indexation of the tax system, inflation exacerbates the inefficiencies generated by taxation. The aim of this paper is to evaluate the welfare effects of these distortions in New Zealand. By using a stylised model of the New Zealand tax system, the tax burden on capital income is calculated for different values of the inflation rate. Following Feldstein (1997a, 1997b), the paper then estimates the welfare effects of going from 2 percent `true' inflation (net of measurement bias) to price stability. The benefits turn out to be about 0.4 percent of GDP, approximately half the size of those calculated by Feldstein for the US, the difference being mainly due to a less distortionary tax system. The permanent benefits are then compared with the one-off output loss that would be involved. As for the US, the result is supportive of price stability, but it does not hold for plausible values of some key parameters.

Suggested Citation

  • Leo Bonato, 1998. "Price stability: some costs and benefits in New Zealand," Reserve Bank of New Zealand Discussion Paper Series G98/10, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:1998/10
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    References listed on IDEAS

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    1. Mervyn A. King & Don Fullerton, 1984. "Introduction to "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany"," NBER Chapters,in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 1-6 National Bureau of Economic Research, Inc.
    2. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1, January.
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    Cited by:

    1. Blaszkiewicz, Monika & Konieczny, Jerzy & Myslinska, Anna & Radziwil, Artur & Przemyslaw, Wozniak, 2002. "Some benefits of reducing inflation in transition economies," BOFIT Discussion Papers 16/2002, Bank of Finland, Institute for Economies in Transition.
    2. Anne-Marie Brook & Özer Karagedikli & Dean Scrimgeour, 2002. "An optimal inflation target for New Zealand: lessons from the literature," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, September.
    3. Leo Bonato, 1998. "The benefits of price stability: some estimates for New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, September.
    4. Brian O'Reilly & Mylène Levac, 2000. "Inflation and the Tax System in Canada: An Exploratory Partial-Equilibrium Analysis," Staff Working Papers 00-18, Bank of Canada.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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