Document Type

Article

Publication Date

2009

Source Publication

Journal of Macroeconomics

Abstract

This paper considers a model of an open economy in which the degree of income-tax progressivity influences the interaction among openness, central bank independence, and the inflation rate. Our model suggests that an increase in the progressivity of the tax system induces a smaller response in real output to a change in the price level. This implies that increased income-tax progressivity reduces the equilibrium inflation rate and that the effect of increased income-tax progressivity on inflation is smaller when the central bank places a higher weight on inflation or when there is greater openness. Examination of cross-country inflation data provides empirical support for these key predictions.

Comments

Originally published in Journal of Macroeconomics, Volume 31 (2009), DOI: 10.1016/j.jmacro.2008.10.003.