Redistributive Tax Policy at the Zero Bound

Lancastre, Manuel (2017): Redistributive Tax Policy at the Zero Bound.

Abstract

Generating consumer price inflation with an increasing path of consumption taxes when the nominal interest rate zero lower bond is binding and monetary policy becomes ineffective, as proposed by Correia et al. [1], may not neutralize a liquidity trap when liquidity is constrained. Instead, this paper shows that a redistributive tax policy may counteract a zero bound recession in liquidity constrained economies with no need to increase public spending and debt, with a fiscal prescription curiously opposite to the one proposed by Correia et al. [1].

• Item Type: MPRA Paper
• Language: English
• Keywords: Zero Bound; Fiscal policy; Credit constraints; Sticky prices; Heterogeneous agents; Redistribution
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

References

Correia, I., Farhi, E., Nicolini, J.P., and Teles, P. (2013). Unconventional fiscal policy at the zero bound. The American Economic Review, 103(4):1172–1211.

Eggertsson, G.B. (2010). The paradox of toil. FRB of New York Staff Report, (433).

Eggertsson, G.B. and Mehrotra, N.R. (2014). A model of secular stagnation. Technical report, National Bureau of Economic Research.

Eggertsson, G.B. and Woodford, M. (2006). Optimal monetary and fiscal policy in a liquidity trap. In NBER International Seminar on Macroeconomics 2004, pages 75–144. The MIT Press.

Hansen, A.H. (1939). Economic progress and declining population growth. The American Economic Review, pages 1–15.

Havranek, T., Horvath, R., Irsova, Z., and Rusnak, M. (2015). Cross-country heterogeneity in intertemporal substitution. Journal of International Economics, 96(1):100–118.

Krugman, P. (2013). Secular stagnation, coalmines, bubbles, and Larry Summers. The Conscience of a Liberal, 16.

Krugman, P.R., Dominquez, K.M., and Rogoff, K. (1998). It’s baaack: Japan’s slump and the return of the liquidity trap. Brookings Papers on Economic Activity, pages 137–205.

Piketty, T. (2013). Le capital au XXIe siècle. Seuil.

Summers, L.H. (2014). Us economic prospects: Secular stagnation, hysteresis, and the zero lower bound. Business Economics, 49(2):65–73.

Teulings, C. and Baldwin, R. (2014). Secular stagnation: facts, Causes and Cures. CEPR Press.