Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
967335 | Journal of Monetary Economics | 2007 | 14 Pages |
Abstract
A nominal tax system is added to a sticky-price monetary business cycle model. When nominal interest income is taxed, the coefficient on inflation in a Taylor-type monetary policy rule must be significantly larger than one in order for the model economy to have a determinate rational-expectations equilibrium. When effective tax rates are raised by inflation, the stability of the economy's equilibrium can be adversely affected. Finally, when depreciation is treated as a charge against taxable income, an even larger weight on inflation is required in the Taylor rule in order to obtain a determinate and stable equilibrium.
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Authors
Rochelle M. Edge, Jeremy B. Rudd,