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Progressive taxation and optimal monetary policy in a two‐country new Keynesian model

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  • Daisuke Ida
  • Kenichi Kaminoyama

Abstract

This paper examines the effect of tax progressivity on optimal monetary policy in a two‐country new Keynesian model. We first address the issue that coefficients in both structural equations and the central bank's loss function are crucially affected by a change in tax progressivity in both countries. Second, we show that a change in tax progressivity significantly affects the properties of international monetary policy transmission. Third, we demonstrate that the impact of tax progressivity on international monetary policy transmission depends on the value of the constant relative risk‐aversion coefficients.

Suggested Citation

  • Daisuke Ida & Kenichi Kaminoyama, 2023. "Progressive taxation and optimal monetary policy in a two‐country new Keynesian model," International Finance, Wiley Blackwell, vol. 26(3), pages 260-285, December.
    • Handle: RePEc:bla:intfin:v:26:y:2023:i:3:p:260-285
    DOI: 10.1111/infi.12428
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