Optimal Taxation of Inflation
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Summary:
When inflation originates from distributional conflicts, shifts in inflation expectations, or energy price shocks, monetary policy (MP) is a costly stabilization instrument. We show that a tax on inflation policy (TIP), which would require firms to pay a tax proportional to the increase in their prices, would effectively correct externalities in firms’ pricing decisions, tackle excessive inflation and reduce output volatility, without exacerbating price distortions. While proposals from the 1970s saw TIP as a substitute to MP, we find that it is a complement, with TIP addressing markups and inflation expectation shocks, and MP addressing demand shocks.
Series:
Working Paper No. 2023/254
Subject:
Inflation Labor Output gap Prices Production Sticky prices Wage adjustments Wages
Frequency:
regular
English
Publication Date:
December 8, 2023
ISBN/ISSN:
9798400261169/1018-5941
Stock No:
WPIEA2023254
Format:
Paper
Pages:
109
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