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Equilibria Under Monetary and Fiscal Policy Interactions with Distortionary Taxation

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Abstract

This paper studies how the presence of an income tax changes the properties of general equilibrium models. It fi nds that relative to the previous literature [following Leeper (1991)] a new area of determinacy exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the passive fiscal-passive monetary regime. In this regime, scal limits bring about a Tobin effect and nominal prices are determined according to the quantity theory of money.

Suggested Citation

  • Gliksberg, Baruch, "undated". "Equilibria Under Monetary and Fiscal Policy Interactions with Distortionary Taxation," Working Papers WP2014/4, University of Haifa, Department of Economics.
    • Handle: RePEc:haf:huedwp:wp201404
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    Keywords

    Distorting Taxes; Dynamic Laffer Curve; Equilibrium Determinacy;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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