Monetary Policy and Automatic Stabilizers:The Role of Progressive Taxation

Mattesini, F. and Rossi, L. (2012) Monetary Policy and Automatic Stabilizers:The Role of Progressive Taxation. Journal of Money, Credit and Banking, 44 (5). pp. 825-862. ISSN 0022-2879

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Abstract

We study the effects of progressive labor income taxation in an otherwise standard New Keynesian (NK) model. We show that progressive taxation (i) introduces a trade-off between output and inflation stabilization and affects the slope of the Phillips Curve, (ii) acts as automatic stabilizer changing the responses to technology shocks and demand shocks, and (iii) alters the prescription for the optimal monetary policy. The welfare gains from commitment decrease as labor income taxes become more progressive. Quantitatively, the model reproduces the observed negative correlation between the volatility of output, hours, and inflation and the degree of progressivity of labor income taxation.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Money, Credit and Banking
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1402
Subjects:
ID Code:
160500
Deposited By:
Deposited On:
06 Oct 2021 16:00
Refereed?:
Yes
Published?:
Published
Last Modified:
07 Oct 2021 07:52