Progressive taxation and human capital as determinants of inflation persistence |
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| Affiliation: | 1. Institute for Advanced Studies (IHS) Vienna, Josefstaedter Strasse 39, 1080, Vienna, Austria;2. Vienna University of Economics and Business, Department of Finance, Accounting, and Statistics, Welthandelsplatz 1, 1020, Vienna, Austria;1. Warsaw School of Economics, International Comparative Studies Department, Warsaw, Poland;2. Centre for Social and Economic Research, Warsaw, Poland;1. Department of Statistics, The Chinese University of Hong Kong, Hong Kong;2. Department of Mathematics and Statistics, School of Decision Science, The Hang Seng University of Hong Kong, Hong Kong;3. School of Mathematics and Applied Statistics, University of Wollongong, NSW 2522, Australia;1. Webster Vienna Private University, Vienna, Austria;2. University of Portsmouth, Portsmouth, United Kingdom;3. University of Navarra, Pamplona, Spain;4. University of Pretoria, Pretoria, South Africa |
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| Abstract: | In this study, we introduce progressive taxation and human capital differences across productive sectors into a typical monetary policy game. The objective of this work is to reveal the potential short-run effects of these two typical features of economic growth on inflation dynamics. In our framework, such features act as frictions of labor mobility across sectors. We show that an increased progressivity of taxation lowers the diffusion of shocks, and in turn increases inflation persistence. Moreover, the dispersion of human capital across sectors acts as a barrier to labor mobility and thereby increasing inflation inertia through the same channel. We also empirically verify these findings by employing panel data analysis in a sample of 28 OECD countries. |
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| Keywords: | Inflation persistence Human capital Progressive taxation E31 E58 J24 L16 |
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