Taxation and the Taylor principle

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 eq...

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Bibliographic Details
Published in:Journal of monetary economics 2007-11, Vol.54 (8), p.2554-2567
Main Authors: Edge, Rochelle M., Rudd, Jeremy B.
Format: Article
Language:English
Subjects:
Business cycles
Economic models
Equilibrium
Equilibrium determinacy
Inflation
Monetary models
Monetary policy
Sticky prices
Studies
Tax systems
Taxable income
Taxation
Taylor principle
Taylor rule
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Summary: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.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2007.06.026