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Public investment, distortionary taxes and monetary policy transparency

  • Meixing Dai
  • Moïse Sidiropoulos

In a two-period model with distortionay taxes and public investment, we re-examine the interaction between monetary policy transparency and fiscal bias. We find that the optimal choices of tax rate and public investment allow eliminating the effects of fiscal bias and hence neutralize the impact of monetary policy opacity (lack of political transparency) on the level and variability of inflation and output, independently of the institutional quality. Our results are robust to alternative specifications of the game between the private sector, the government and the central bank.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2009-30.

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Date of creation: 2009
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Handle: RePEc:ulp:sbbeta:2009-30
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