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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Monetary Policy and Automatic Stabilizers
T2 - The Role of Progressive Taxation
AU - Mattesini, F.
AU - Rossi, L.
PY - 2012/8/31
Y1 - 2012/8/31
N2 - 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.
AB - 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.
KW - Progressive taxation
KW - automatic stabilizers
KW - macroeconomic volatility
KW - optimal monetary policy
U2 - 10.1111/j.1538-4616.2012.00512.x
DO - 10.1111/j.1538-4616.2012.00512.x
M3 - Journal article
VL - 44
SP - 825
EP - 862
JO - Journal of Money, Credit and Banking
JF - Journal of Money, Credit and Banking
SN - 0022-2879
IS - 5
ER -