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Optimal Taxation of Inflation

Author

Listed:
  • Mr. Damien Capelle
  • Yang Liu

Abstract

When inflation originates from distributional conflicts, shifts in inflation expectations, or energy price shocks, monetary policy (MP) is a costly stabilization instrument. We show that a tax on inflation policy (TIP), which would require firms to pay a tax proportional to the increase in their prices, would effectively correct externalities in firms’ pricing decisions, tackle excessive inflation and reduce output volatility, without exacerbating price distortions. While proposals from the 1970s saw TIP as a substitute to MP, we find that it is a complement, with TIP addressing markups and inflation expectation shocks, and MP addressing demand shocks.

Suggested Citation

  • Mr. Damien Capelle & Yang Liu, 2023. "Optimal Taxation of Inflation," IMF Working Papers 2023/254, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/254
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