2024 North American Summer Meeting: June, 2024
Optimal Taxation of Inflation
Damien Capelle, Yang Liu
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 they are complementary, with TIP addressing markups and inflation expectation shocks, and MP addressing demand shocks.
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 they are complementary, with TIP addressing markups and inflation expectation shocks, and MP addressing demand shocks.