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Tax Rules to Prevent Expectations-driven Liquidity Trap

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  • Yoichiro Tamanyu

    (Graduate School of Economics, Keio University)

Abstract

This paper demonstrates that a simple Ricardian tax policy responding to inflation can prevent expectations-driven liquidity trap (ELT) using a standard New Keynesian model. I show that the extent to which tax rates must respond to inflation is affected by the persistence of remaining at the ELT and higher persistence requires larger response to inflation. I further find that if the ELT is assumed to be recurrent, the tax rate needs to respond to inflation by a larger extent compared to the case where the targeted regime is assumed to be absorbing. This last finding indicates that it is crucial for the fiscal authority to entertain the possibility of moving back to the ELT when it sets their policy parameters.

Suggested Citation

  • Yoichiro Tamanyu, 2019. "Tax Rules to Prevent Expectations-driven Liquidity Trap," Keio-IES Discussion Paper Series 2019-005, Institute for Economics Studies, Keio University.
    • Handle: RePEc:keo:dpaper:2019-005
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    Cited by:

    1. Philip Coyle & Taisuke Nakata, 2020. "Optimal Inflation Target with Expectations-Driven Liquidity Traps," CARF F-Series CARF-F-485, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Taisuke Nakata & Sebastian Schmidt, 2022. "Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 68-103, October.
    3. Yoichiro Tamanyu, 2020. "The Role of Nonlinearity in Indeterminate Models: An Application to Expectations-Driven Liquidity Traps," Keio-IES Discussion Paper Series 2020-023, Institute for Economics Studies, Keio University.

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    More about this item

    Keywords

    Expectations-driven Liquidity Trap; Fiscal Policy; Monetary Policy; Regime Switching; Zero Lower Bound;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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