Tax distortions and the case for price stability |
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Authors: | Fabrice Collard |
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Institution: | a CNRS-GREMAQ, IDEI, University of Toulouse, 31000 Toulouse, France b Department of Economics, University of Bern, Gesellschaftsstrasse 49, 3012 Bern, Switzerland c CEPR, London, ECIV 7RR, UK d IMOII |
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Abstract: | We investigate the case for price stability in the general version of the New Keynesian (NNS) model with capital and several shocks. The model includes, in addition to the standard imperfect competition and monetary frictions, a non-trivial, endogenous tax distortion. We find that the case for perfect price stability is not significantly weakened. Optimal policy tolerates a small amount of output gap and price variability by reacting less strongly to supply and fiscal shocks in comparison to a policy that aims at perfect price stabilization. |
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Keywords: | E32 E52 |
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