Template-Type: ReDIF-Paper 1.0
Title: Fiscal Progressivity and the Time Consistency of Monetary Policy
Author-Name: Antoine Camous
Author-Email: camous@uni-mannheim.de
Classification-JEL: E02, E42, E52, E61, E62
Keywords: Monetary-Fiscal Policy, Progressive Labor Income Taxes, Inflation Bias, Time Consistency, Political Economy, Heterogeneous Agents

Abstract: This paper studies how progressive fiscal policy influences the conduct of monetary policy in a
tractable heterogeneous agent economies. A priori, progressive labor taxation is undesirable because
it generates costly distortions. Nonetheless, it is an effective instrument to mitigate the inflation bias
of monetary policy because it achieves a redistributive purpose. I analyze this commitment channel of
progressive labor taxes through the lens of political conflicts. When agents vote on monetary and fiscal instruments,
progressivity is decisive in curbing the inflation bias because it generates distributional
conflicts, lower-productivity agents support higher labor taxes to preserve the consumption value of
money holding and shift the burden of policy distortions to higher-productivity agents. Anticipating the
reduction in inflation, agents unanimously desire to adopt a progressive fiscal system.

Note: 
Length: 32
Creation-Date: 2023-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp387
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_387