We add a nominal tax system to a sticky-price monetary business cycle model. When nominal interest income is taxed, the coefficient on inflation in a Taylor-type monetary policy rule must be significantly larger than one in order for the model economy to have a determinate rational expectations equilibrium. When depreciation is treated as a charge against taxable income, an even larger weight on inflation is required in the Taylor rule in order to obtain a determinate and stable equilibrium. These results have obvious implications for assessing the historical conduct of monetary policy.
- E43 - Money and interest rates - Determination of interest rates ; Term structure of interest rates
- E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation
- E12 - General aggregative models - Keynes ; Keynesian ; Post-Keynesian
- E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
- Federal Reserve Bank of Minneapolis. Research Department.
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