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Income Taxation, Interest-Rate Control and Macroeconomic Stability with Balanced-Budget

  • Seiya Fujisaki

    ()

    (Graduate School of Economics, Osaka University)

  • Kazuo Mino

    ()

    (Graduate School of Economics, Osaka University)

This paper studies stabilization effects of fiscal and monetary policy rules in the context of a standard real business cycle model with money. We assume that the fiscal authority adjusts the rate of income tax subject to the balanced-budget constraint, while the monetary authority controls the nominal interest rate by observing inflation. Inspecting macroeconomic stability of the steady state equilibrium of the model economy, we demonstrate that whether or not policy rules eliminate the possibility of sunspot-driven fluctuations critically depends upon the appropriate combination of progressiveness of taxation and activeness of interest-rate control.

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File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0820.pdf
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Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 08-20.

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Length: 31 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:osk:wpaper:0820
Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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  1. Stefano Eusepi & Jess Benhabib, 2005. "The Design of Monetary and Fiscal Policy: A Global Perspective," Computing in Economics and Finance 2005 388, Society for Computational Economics.
  2. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
  3. Rochelle M. Edge & Jeremy B. Rudd, 2002. "Taxation and the Taylor principle," Finance and Economics Discussion Series 2002-51, Board of Governors of the Federal Reserve System (U.S.).
  4. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  6. Nicolas L. Dromel & Patrick A. Pintus, 2008. "Are Progressive Income Taxes Stabilizing?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 329-349, 06.
  7. Itaya, Jun-Ichi & Mino, Kazuo, 2007. "Technology, Preference Structure, And The Growth Effect Of Money Supply," Macroeconomic Dynamics, Cambridge University Press, vol. 11(05), pages 589-612, November.
  8. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  9. Kurozumi, Takushi, 2010. "Distortionary taxation and interest rate policy," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 476-491, March.
  10. Benhabib, J. & Schmitt-Grohe, S. & Uribe, M., 1998. "Monetary Policy and Multiple Equilibria," Working Papers 98-02, C.V. Starr Center for Applied Economics, New York University.
  11. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
  12. Guo, Jang-Ting & Harrison, Sharon G., 2004. "Balanced-budget rules and macroeconomic (in)stability," Journal of Economic Theory, Elsevier, vol. 119(2), pages 357-363, December.
  13. Dupor, Bill, 2001. "Investment and Interest Rate Policy," Journal of Economic Theory, Elsevier, vol. 98(1), pages 85-113, May.
  14. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper 0320, Federal Reserve Bank of Cleveland.
  15. Nicolas Dromel & Patrick-Antoine Pintus, 2006. "Are Progressive Fiscal Rules Stabilizing?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00410452, HAL.
  16. Jun-Ichi Itaya & Kazuo Mino, 2003. "Inflation, Transaction Costs and Indeterminacy in Monetary Economies with Endogenous Growth," Economica, London School of Economics and Political Science, vol. 70(279), pages 451-470, 08.
  17. Thomas Lubik, 2003. "Investment Spending,Equilibrium Indeterminacy and the Interactions of Monetary and Fiscal Policy," Economics Working Paper Archive 490, The Johns Hopkins University,Department of Economics.
  18. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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