Taxation,rational expectations,and the neutrality of money

When progressive taxation of nominal income is introduced into a Barro-type monetary model with rational expectations, money may not be neutral even in the long run. In the short run, unanticipated money changes may cause output and prices to move either in the same or in opposite directions. The implications of this model are consistent with both the traditional inflation-output trade-off and the more recent phenomenon of “stagflation.”