Optimal Taxation of Inflation

December 8, 2023

Preview Citation

Format: Chicago

Damien Capelle, and Yang Liu. Optimal Taxation of Inflation, (USA: International Monetary Fund, 2023) accessed October 20, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Inflation, Labor, Output gap, Prices, Production, Sticky prices, Wage adjustments, Wages

Keywords: Energy price shock, Excessive inflation, Externality, Inflation, Inflation expectation shock, Markup Shock, Monetary Policy, Output gap, Phillips curve, Price distortion, Sticky prices, Tax on Inflation, Taxbased Incomes Policies, Wage adjustments, Wages, Western Europe

Publication Details

Pages:

109
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/254
Stock No:

WPIEA2023254
ISBN:

9798400261169
ISSN:

1018-5941

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