We thank Alice Albonico, Guido Ascari, Paolo Bonomolo, Huw Dixon, Rochelle Edge, Andrea Ferrero, Jordi Galì, Henrik Jensen, Anton Nakov, and the participants of the “Zeuthen Workshop in Macroeconomics 2010” and of the 2010 EES conference on “Monetary and Fiscal Policy for Macroeconomic Stability” for their comments and suggestions. We also thank the participants of the University of Milan “Bicocca” internal seminar. Lorenza Rossi thanks the Foundation Alma Mater Ticinensis for financial support through the research grant “Promuovere la ricerca d’eccellenza.” All errors are our own responsibility.
Monetary Policy and Automatic Stabilizers: The Role of Progressive Taxation
Version of Record online: 26 JUL 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue 5, pages 825–862, August 2012
How to Cite
MATTESINI, F. and ROSSI, L. (2012), Monetary Policy and Automatic Stabilizers: The Role of Progressive Taxation. Journal of Money, Credit and Banking, 44: 825–862. doi: 10.1111/j.1538-4616.2012.00512.x
Fabrizio Mattesini is at the University of Rome “Tor Vergata.” Lorenza Rossi is at Department of Economics and Business, University of Pavia, via San Felice al Monastero, 27100–Pavia (IT). (E-mail: email@example.com).
- Issue online: 26 JUL 2012
- Version of Record online: 26 JUL 2012
- Received January 29, 2010; and accepted in revised form October 25, 2011.
- progressive taxation, automatic stabilizers, macroeconomic volatility, optimal monetary policy
We study the effects of progressive labor income taxation in an otherwise standard New Keynesian (NK) model. We show that progressive taxation (i) introduces a trade-off between output and inflation stabilization and affects the slope of the Phillips Curve, (ii) acts as automatic stabilizer changing the responses to technology shocks and demand shocks, and (iii) alters the prescription for the optimal monetary policy. The welfare gains from commitment decrease as labor income taxes become more progressive. Quantitatively, the model reproduces the observed negative correlation between the volatility of output, hours, and inflation and the degree of progressivity of labor income taxation.