Monetary-fiscal policy interactions and the price level:Background and beyond |
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Authors: | Eric M Leeper Tack Yun |
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Institution: | (1) Department of Economics and Center for Applied Economics and Policy Research, Indiana University and NBER, Indiana;(2) Monetary Affairs Division, Federal Reserve Board, USA |
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Abstract: | The paper presents the fiscal theory of the price level in a variety of models, including endowment economies with lump-sum
taxes and production economies with proportional income taxes. We offer a microeconomic perspective on the fiscal theory by
computing a Slutsky-Hicks decomposition of the effects of tax changes into substitution, wealth, and revaluation effects.
Revaluation effects arise whenever tax changes alter the value of outstanding nominal government liabilities by changing the
price level. Under certain assumptions on monetary and fiscal behavior, the revaluation effect reflects the fiscal theory
mechanism. When taxes distort, two Laffer curves arise, implying that a tax increase can lower or raise the price level and
the revaluation effect can be positive or negative, depending on which side of a particular Laffer curve the economy resides.
Jel Code: E31 · E52 · E62 |
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Keywords: | Income taxes Inflation Debt revaluation Laffer curve |
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