Progressive consumption tax and monetary policy in an endogenous growth model

This paper analyzes the impact of the interaction between monetary policy and fiscal policy on the stability of an one-sector AK economy. The monetary authority pegs the money growth factor while the fiscal authority implements a progressive consumption tax. The demand of money is motivated by a fra...

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Bibliographic Details
Published in:Journal of economics (Vienna, Austria) Austria), 2021-08, Vol.133 (3), p.271-293
Main Authors: Fu, Zhiming, Le Riche, Antoine
Format: Article
Language:English
Subjects:
Authority
Consumption
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Endogenous
Fiscal policy
Game Theory
Growth models
Liquidity
Macroeconomics/Monetary Economics//Financial Economics
Microeconomics
Monetary policy
Money
Public Finance
Social and Behav. Sciences
Taxation
Use taxes
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Summary:This paper analyzes the impact of the interaction between monetary policy and fiscal policy on the stability of an one-sector AK economy. The monetary authority pegs the money growth factor while the fiscal authority implements a progressive consumption tax. The demand of money is motivated by a fractional liquidity constraint on consumption expenditures. When only the monetary authority operates, the unique steady state is locally indeterminate if the intertemporal elasticity of substitution in consumption is low enough. When the fiscal authority is introduced, the interaction of fiscal policy and monetary policy modifies significantly the stability properties. In particular, the fiscal authority could either stabilize or destabilize the economy depending on the tax progressivity, the strength of the liquidity constraint and the intertemporal elasticity of substitution. Our numerical examples further verify those theoretical results.
ISSN:0931-8658
1617-7134
DOI:10.1007/s00712-021-00732-0