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Do tax distortions lead to more indeterminacy? A New Keynesian perspective

Di Bartolomeo, Giovanni and Manzo, Marco (2007): Do tax distortions lead to more indeterminacy? A New Keynesian perspective.

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Abstract

Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule.

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